IOSCO wants all securities regulators to enforce CFD leverage limitations, negative balance protection

ESMA - Did they go too far?

The International Organization of Securities Commissions (IOSCO) has published a Report on Retail OTC Leveraged Products, providing its own guidance to the world’s financial and securities regulators on the future of leveraged trading.

IOSCO members include virtually all of the key major (and minor) global regulators including the FCA in the UK, the SEC in the US, Cyprus’ CySEC, Australia’s ASIC and even the CSRC in China and Vietnam’s SSC.

In addition to the report, the IOSCO opened a consultation on the matter, seeking feedback on the tools and measures it proposed with all responses due by March 27, 2018.

The key issues addressed by the IOSCO include:

  • A licensing requirement for all firms that sell the relevant products to retail investors either domestically or on a cross-border basis;
  • Leverage limits or minimum margin requirements;
  • Measures to address the risk of investors losing more than their initial investment;
  • Measures to enhance the disclosure of costs and charges of the products;
  • Measures to improve the disclosure of risks of the products, including profit and loss ratios;
  • Other focused requirements to enhance the quality of pricing and order execution; and,
  • Measures to restrict the sale, distribution and marketing of the products with a view to addressing mis-selling risk.

Unlike the recent proposals put forth by pan-European financial regulator ESMA, the IOSCO did not give specific guidance as to what max leverage should be – just that the issue should be addressed and each individual country regulator should have some figure in place to avoid clients being offered unlimited leverage, which inevitably leads to trading abuse and clients’ rapid loss of capital.

Also, unlike with ESMA, the IOSCO does not really have the political or media clout to force individual country regulators to adopt its specific proposals. When ESMA comes out with its final rule proposals, which should be soon as its consultation period lapsed on February 5, there is the general expectation that all EU regulators, perhaps with the exception of the FCA in the UK, will adopt its proposals.

Back to the IOSCO….

One of the main issues addressed by the IOSCO is the requirement for all brokers offering cross-border services – i.e. those taking clients not from their home country, which is virtually every broker out there – be properly licensed in the country from which they take clients. The IOSCO decided to place this issue as the first one in its list.

The IOSCO also proposed the blanket provision of negative balance protection for clients trading with leverage, such that retail traders can never lose more than what they have deposited with their broker.

The last issue in the IOSCO report, but what it stated was a fairly important one, is that of marketing of leveraged financial products, including Binary Options. The IOSCO is advocating restrictions on the marketing of Binary Options as well as other high-risk leveraged financial products, encouraging much more detailed disclosures of the risks involved.

More details regarding the IOSCO’s consultation and report can be seen here.

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