The Comision Nacional del Mercado de Valores (CNMV), the financial regulatory body of Spain, has issued a circular setting a host of new rules regarding trading costs and risks disclosure, leverage and advertising requirements. In essence the new guidance concerns companies that offer forex, contracts for difference (CFDs) and other speculative products such as binary options among retail investors in Spain.
Finance Magnates reported on this move last week when the regulator issued a communique to companies from the industry.
In its circular, the Spanish authority requires brokers that offer these products to take additional steps to increase client protection.
More specially, the CNMV notes that brokers offering ‘excessive leverage’ greater than 1:10 to explicitly warn investors that it believes that such products are not appropriate for retail investors due to their complexity and the risks involved.
Operators are also required to ensure that clients are aware of the estimated cost in case they decide to close their position immediately after entering into the transaction. Furthermore, the CNMV expects that the CFDs and forex brokers will warn their clients that they can lose more than they originally invested due to the nature of margin trading.
The CNMV also sets up a rule that mandates brokers to obtain from the investor a written text or voice recording that proves that he is aware that the product is especially complex and it may not be appropriate for retail investors.
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As for the advertising of trading products, the brokers must display a warning about the nature of leveraged trading and products, disclosing that it may not be appropriate for retail investors to engage in transactions due to their complexity and risks.
A Screen of Warning Signs
Every time a client opens an order or position some confirmation dialogues should be displayed. Here is an approximate translation from Spanish:
“You are about to acquire a product that is not simple and may be difficult to understand: insert name of the product. The CNMV considers that due to the complexity and high risk, the product is not suitable for retail investors.”
In the case of leveraged products, there is an additional disclaimer:
“The product you are about to acquire is a product with leverage. You should be aware that the losses acquired via trading this product may exceed the amount that is required to open the position.”
The brokerage is also required to evaluate every client’s suitability for trading such instruments, which is already an existing rule. The news here is that every client that fails the suitability test will have to manually confirm with letters: “This product is complex and the CNMV considers it unsuitable for me.”
In conclusion, the Spanish watchdog gives the forex, CFDs and binary options brokers one month from receipt of the circular to take the appropriate measures and actions in order to operate with the new rules. From then on, the regulator intends to conduct reviews to ensure they are complying with them, as well as with the general provisions of the law.