The European Securities and Markets Authority (ESMA) issued an opinion on Tuesday, supporting the Dutch financial markets regulator’s proposal to impose restrictions on the retail sale of Turbo certificates, which is a widely used investment instrument in some European markets.
Turbos are similar to contract for differences (CFDs) in many aspects: both are leveraged investment products. However, turbos have a built-in stop loss, and positions are automatically closed once a predetermined price level is reached. While CFDs closely resemble futures, turbo certificates are closer to options where loss is effectively restricted.
“These measures concern turbos which are high-risk leveraged products with which investors speculate that the prices of the underlying asset, such as a share, an index or a currency, will rise or fall,” the pan-European regulator stated.
“ESMA’s opinion concludes that the proposed measures are justified and proportionate.”
The Netherlands Authority for the Financial Markets (AFM) raised concerns earlier that retail investors are inefficiently protected against these derivative products. In addition, it cited a regulatory survey that found that 68 percent of the retail turbo investors lose their money with an average loss of €2,680.
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Its proposal of restriction on the marketing, distribution and sale of these instruments would benefit the retail traders. It suggested a limit on leverage, showing mandatory trading risk warnings and a ban on trading bonuses.
Though Turbo certificates are not as popular as CFDs, they have a significant reach in Dutch, German, Belgian and Austrian markets.
Moreover, ESMA encouraged all National Competent Authorities (NCAs) to monitor Turbos on their respective markets and assess the risks of these instruments to retail traders.
The Dutch regulator’s proposal to restrict Turbo came after its imposed similar curbs on CFDs on the recommendation of ESMA.