ESMA Extends Curbs on Selling CFDs to Retail Investors

The restrictions have heaped pressure on the industry, and already hurt the profitability of large UK online brokers.

Europe’s financial regulator has extended its temporary restrictions on selling contracts for differences (CFDs) to retail customers for a further three-month period, saying it was still concerned about investor protection.

The European Securities and Markets Authority (ESMA) said on Tuesday that it would renew curbs on the “marketing, distribution or sale” of the derivatives to retail traders, which came into force in August, for another three months starting on February 1, 2019.

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Earlier in September, the EU markets watchdog extended its tough limitation for the first time until the end of January 2019 when the initial decision was scheduled to expire on November 1, 2018.

ESMA stated it agreed to renew the measure on the same terms as the previous renewal decision, which introduced a reduced-character risk warning as some brokers experienced difficulties due to limits imposed by third-party ad providers on the number of used characters. The regulator agreed the mandatory disclosure text to take the following format: “[insert percentage per provider]% of retail CFD accounts lose money.”

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The Crackdown Hurts Providers’ Profitability

But the decision is a further blow to the struggling online trading sector as these speculative trading products are popular with their retail clients. As expected, the restrictions have heaped pressure on the industry, and already hurt the profitability of large UK brokers such as IG Group and CMC Markets.

As part of its broad clampdown on the industry, ESMA in November extended a temporary ban on the sale of binary options to retail investors.

The regulator has the power to renew any three-month restrictions again if it feels national regulators have not taken sufficient action to protect investors. Overall, it constituted ESMA’s first use of its newly acquired intervention powers under MiFID II rules, which came into effect in January 2018.

The decision includes renewing the following leverage limits, which vary according to the volatility of each asset class:

  • 30:1 for major currency pairs;
  • 20:1 for non-major currency pairs, gold, and major indices;
  • 10:1 for commodities other than gold and non-major equity indices;
  • 5:1 for individual equities and other reference values; or
  • 2:1 for cryptocurrencies.
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