Renewed restrictions on CFDs

Renewed restrictions on CFDs

The European Securities and Markets Authority (ESMA) has agreed to renew the restrictions on the marketing, distribution or sale of contracts for differences (CFDs) to retail clients, in effect since 1 August.

These restrictions will come into effect from 1 May 2019 for a further three-month period.

ESMA considers that a significant investor protection concern related to the offer of CFDs to retail clients continues to exist. It has therefore agreed to renew the measures from 1 May 2019 on the same terms as the previous renewal decision that started to apply on 1 February 2019.

The renewal of restrictions on CFDs includes renewing the following :

Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying  (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; 2:1 for cryptocurrencies);

A margin close-out rule on a per account basis. This standardises the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail clients’ open CFDs;

Negative balance protection on a per account basis. This provides an overall guaranteed limit on retail client losses;

A restriction on the incentives offered to trade CFDs;

A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

Although these new restrictions are not permanent and will only run for three months, ESMA can prolong them at the end of each three-month period. This most recent renewal will come into effect at the beginning of May and run until the end of August, meaning such measures on CFDs will have been in place for a year.

CFD trading makes it possible to trade without needing to buy or sell any underlying assets. CFDs are derivatives that give traders and investors the opportunity to negotiate markets (Forex, indices, commodities…) without owning the underlying assets.

With CFDs, a client and broker agree to exchange the difference between the current value of an asset and its value at contract time. One of the main advantages of CFD trading is it allows traders to take advantage of prices moving up or down, and results depend on how savvy their predictions are.

CFD trading uses leverage, which means traders need only deposit a small percentage of the total trade value to gain a similar level of exposure to the markets. But leverage also means risk, and therefore ESMA places restrictive measures on these leveraged products.

For retail clients, CFDs can be lucrative but also risky, hence ESMA’s repeated application of these restrictive measures.

Last Update on 08/04/19

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