The Supervisory Board of the European Securities and Markets Authority (ESMA) agreed on measures to limit the provision of contracts for difference (CFD) and binary options to retail investors in the European Union on March 23, 2018. 

Agreed measures include the following:

  1. Binary options: a ban on marketing, distribution or sale of binary options to retail investors.
  2. Contracts for difference: restriction on marketing, distribution or sale of CFD to retail investors. Possibilities of any transactions with contracts for difference, allowing retail investors to play on spreads (difference between the best prices of orders for a sale and the purchase of an asset at the same time) are significantly restricted. 

Significant problem of investor protection

The ESMA, along with the National Competent Authorities (NCA), concluded that there is a significant problem of protecting the interests of investors in relation to CFDs and binary options. The foregoing is due to the complexity of processes and lack of transparency. Binary options and CFD inhere a built-in conflict of interest between providers and their customers, as well as risks of discrepancies in expected profits and losses.

The analysis of NCA on CFD trade in various EU jurisdictions shows that 74-89% of retail accounts usually lose money on their investments, with an average loss per customer ranging fr om 1,600 to 29,000 euros. The NCA analysis for binary options also showed permanent losses on the accounts of natural clients.

"The opportunities for generating a large income, simplicity of digital platforms and record low interest rates attract retail investors. But they suffer significant losses due to the complexity of financial products and excessive use of financial leverage", commented Stephen Mayor, Chairman of the Supervisory Board.

List of agreed measures

In accordance with article 40 MiFID, the following decision was made:

  1. Set limits of leverage (indices or multipliers) for retail investors are limited: from 30:1 to 2:1. Indicators vary depending on the volatility of main leverage:
    • 30:1 - for main currency pairs;
    • 20:1 - for non-core currency pairs, gold and major indices;
    • 10:1 - for goods other than gold and foreign exchange indices;
    • 5:1 - for individual shares and other control values;
    • 2:1 - for crypto conversions.
  2. Introduction of margin closing rule for each account. The foregoing will allow to standardize the margin percentage (with 50% of minimum required margin) due to which providers must close one or more open CFDs of retail customers.
  3. Ensuring protection against negative balance for each account. This will provide a total guaranteed lim it on the losses of retail customers.
  4. Establishing a restriction on incentives in the sphere of CFD trade.
  5. Standardizing the risk warning, including percentage of losses in the accounts of retail investors of CFD provider.

Next steps

The ESMA intends to publish the indicated measures in the Official Journal of the EU in the near future, and they will start to operate for binary options in a month, and for CFDs - in two months. Upon expiry of three months after start of application of the restrictions, the ESMA will re-consider the situation and may extend the validity of the measures.