FCA Confirms Rules for CFDs, CFD-Like Options

ESMA-style leverage caps and marketing restrictions will now be made permanent

The Financial Conduct Authority confirmed rules that it would be using to govern the retail trading industry on Monday.

As expected, the British regulator is going to adopt leverage caps for contracts for difference (CFDs), ranging from 2:1 to 30:1, that are akin to those put in place by the European Securities and Markets Authority last August.

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Brokers will also have to close client positions when their funds fall to 50 percent of the margin needed to keep their trades open. They will also have to ensure they have negative balance protections in place, meaning clients cannot lose more funds than they deposit.

Risk warnings, which already adorn broker websites as though they were cigarette packets, are also going to be made mandatory for retail trading firms, with companies required to tell traders what percentage of their clients lose money.

Lastly, brokers will also be forbidden from attracting customers using casino-style welcome bonuses or any other non-monetary benefits that would encourage them to trade.

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The new rules governing CFDs are set to come into play at the beginning of August.

No loopholes

Given that all of these rules are, by now, old news for most executives in the retail trading industry, the other component of the FCA’s statement on Monday may be of more interest to them.

The regulator also said that its rules apply to any CFD-like options that brokers might feel inclined to offer clients in lieu of regular, leverage-restricted CFD, though they will only apply to them from the beginning of September.

Firms based in the European Economic Area, which have access to UK markets, are also forbidden from selling CFD-like options to British retail clients.

“Our intervention follows evidence of firms aggressively marketing CFDs to the general public, meaning retail consumers are buying a product that isn’t appropriate for them,” said Christopher Woolard, executive director of strategy and competition at the FCA.

“We saw firms offering CFDs with increasingly higher leverage, resulting in high proportions of consumers losing money. EU rules are temporary. The new rules maintain and strengthen protections for consumers.”

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