The European Securities and Markets Authority (ESMA) has announced that in applying the Markets in Financial Instruments Regulation (MiFIR) it is currently reviewing product interventions for contracts for difference (CFDs) including rolling spot forex and binary options. The ESMA has been warning about the highly speculative nature of such financial instruments for years, and has also particularly questioned their suitability for retail investors. MiFIR, which enters into force on 3 January 2018, confers the power on ESMA to impose temporary EU-wide restrictions on, or even prohibit, the distribution of particularly risky and dangerous investment products in order to protect investors.
ESMA is reviewing whether to restrict the marketing, distribution and sale of CFDs including rolling spot forex to retail investors, as well as to completely prohibit binary options. ESMA is currently considering the following distribution restrictions:
- introduction of limits on leverage when opening a position, of between 30:1 and 5:1 depending on the volatility of the underlying security/asset;
- the automatic closing of the position, if the margin falls to a predefined percentage (“margin close-out rule”);
- the exclusion of re-margining in order to provide a fix limit on client losses (“negative balance protection”);
- restrictions in the incentives system for the distribution of CFDs to retail investors;
- mandatory standardised risk warning.
The ESMA may only impose such product intervention measures under MiFIR on a temporary basis, and they expire at the latest after three months, unless ESMA is able to justify and decides to re-impose the restriction.
Contracts For Differences (CFDs): A highly speculative financial product in which the buyer speculates on the change in price of the underlying asset, such as a share, a commodity a currency or an index. If the price falls, then the client is obliged upon payment falling due to make a payment in the amount of the difference between the agreed forward price and the currently valid price on the contract’s settlement date. The leverage effect may cause losses to be incurred that far exceed the amount of the capital invested.
“Rolling Spot Forex”: a CFD relating to the exchange rate of a currency, but one where no fixed due date is arranged. It may be repeatedly renewed (rolled over) until one of the contractual parties decides of their own accord to close the position. Both contractual parties are exposed to highly speculative exchange rate fluctuations.
“Binary Options”: a bet on a binary yes/no decision. If the event defined in advance occurs, then the purchaser receives a defined amount, otherwise the purchased option expired with no value. Indices, share, currency pairs or even commodities may be potentially considered as underlying assets, with speculation occurring solely on the basis of whether the price falls or rises at a fixed point in time. Online offerings of binary options are frequently designed in such a way that the clients will always lose out.
The ESMA release can be found at:
https://www.esma.europa.eu/sites/default/files/library/esma71-99-910_pi_statement_december_2017.pdf
Further information about CFDs, binary options and other highly speculative financial instruments can be found on the FMA website at:
https://www.fma.gv.at/en/fma-thematic-focuses/fma-focus-on-binary-options-and-cfds/
Journalists may address further enquiries to:
Klaus Grubelnik (FMA Media Spokesperson)
+43/(0)1/24959-6006
+43/(0)676/882 49 516