Although representatives of Warsaw-listed XTB stated that the tougher contracts for difference (CFDs) marketing rules introduced in Spain would not affect the fintech's existing operations in any way, investors had a completely different opinion. In response to reports from earlier in the week, the company's shares fell sharply, testing four-month lows.

XTB Shares Lose in Delayed Reaction to CNMV Regulations

In the first half of July, the Spanish financial market regulator CNMV announced that it wants to introduce additional two-part restrictions on the marketing , distribution, and sales of contracts for difference (CFDs) instruments. The decision was due to the fact that 75% of retail traders in this market lost money.

Although the regulations came into effect several weeks ago, they have so far passed without much market attention. Investors only noticed them at the beginning of this week, causing considerable panic on the Polish stock exchange, leading to a double-digit sell-off of XTB's (WSE: XTB) securities. Subsequent sessions brought a continuation of declines, and yesterday (Wednesday), the brokerage house's shares tested four-month lows at PLN 32.66.

The investors' reaction was decidedly different from that of the company itself. As reported on Monday by Finance Magnates, XTB reassured that CNMV's decision would not 'significantly' affect its marketing strategy in the Spanish market, and business would continue as usual.

"From our point of view, the changes in the CNMV guidelines regarding the ban on advertising and any marketing activities related to CFDs on the local market will help clean the local market of unfair practices that negatively affected the image of the entire industry," XTB commented in an official statement.

However, investors are concerned that the CNMV's decision, which received support from the European Securities and Markets Authority (ESMA), may lead to similar tightening of regulations in other countries.

XTB does not provide separate data for the Spanish market in its financial reports, only for Western Europe. In the first half of the year, operations in this area amounted to PLN 191.8 million, constituting 23% of total revenue in H1 2023.

In a telephone conversation with Finance Magnates, a company spokesperson stated that the declines in the stock market did not require additional comments. XTB's position was already presented in the previous official statement.

XTB (Again) Reassures Investors

Responding to considerable confusion in the Polish media regarding declines in XTB's stock market and information about the potentially negative impact of CNMV's decision on the company's operations, XTB published an update on 23 August. It included five points explaining why the decision will not affect business further.

First, the CNMV's guidelines from 18 July ban the advertising of CFDs but do not affect other products. XTB will continue its advertising activities in Spain. Moreover, ESMA has analyzed Spanish regulations, and there is no basis for similar regulations in other markets.

Thirdly, XTB's strategy remains unchanged, focusing on promoting other products, building brand awareness, and educating clients. In addition, XTB is committed to expanding its product offerings, including stocks, ETFs, and fractional shares, across all markets. Finally, XTB is preparing to launch a new product for long-term, passive investment, reflecting its continuous development of client offerings.

"At the same time, as XTB, we support all activities of local regulators, whose aim is to protect the rights and interests of investors. From our point of view, the new CNMV guidelines will strengthen our competitive position in the long term and will allow us to clear the local market of unfair practices that have negatively impacted the image of the entire industry," XTB concluded.

The New CNMV Regulations: What You Need to Know

The initial segment of the newly imposed restrictions, building upon the regulations set by CNMV in 2019 and ESMA in 2018, forbids marketing tactics or communications targeting retail customers or the broader public. This encompasses the recruitment of investors through sales representatives, call centers, or software providers.

These regulations disallow the sponsorship of events and organizations and the engagement of public personalities to promote CFDs. However, there's an exception for sponsorships and brand advertisements by brokers who either don't deal in CFDs or for whom these instruments constitute only a minor portion of their overall business or activities.

Moreover, the new rules make exceptions for specific CFD-related information: details requested solely by a client, information essential for conducting CFD transactions, and objective data on CFDs, such as factual sheets devoid of subjective content.

Conversely, the second part of the added restrictions focuses on the marketing, sale, and distribution to retail clients of other particular 'leveraged products', including certain futures and options. For example, the Spanish regulatory body will mandate providers of these other 'high-risk products' to close one or more open positions of a retail client if the value of those positions falls to half of the initial margin.

Additionally, the reach of this second segment includes an exemption: turbo products, whose total risk equals the investment amount, are not subject to these rules. Turbo products, bearing a resemblance to CFDs, are leveraged derivatives enabling investors to gain from the fluctuations of an underlying asset.