Reed Smith Client Alerts

On 18 January 2018, the European Securities and Markets Authority (ESMA) published a call for evidence on potential product intervention measures relating to the sale, distribution and marketing of contracts for differences (CFDs) and binary options to retail investors. ESMA has asked for comments by 5 February, just 12 working days following publication. ESMA has not said when it will publish follow-up proposals, but the narrow deadline suggests that measures may be imposed sooner rather than later.

In a statement published on 15 December 2017, ESMA expressed its concern about the threat to retail investors’ protection provisions that the proliferation of CFDs poses. ESMA explained in the statement that it was considering the possible use of its product intervention powers under article 40 of MiFIR1 to address the concerns posed by the marketing, distribution and sale of CFDs to retail investors. It expresses the same sentiment in the call for evidence.

Authors: David Calligan Daniel Kadar Simon G. Grieser Alexander Murawa

In ESMA’s view, CFDs:

  1. expose retail investors to significant risk of loss from trading and transaction fees, which is exacerbated by high leverage;
  2. lack transparent information at point of sale, limiting retail investors' ability to understand the risks involved in inherently complex products; and
  3. are subject to incentives and other aggressive marketing techniques.

ESMA believes that the objective of investor protection can be achieved by restriction rather than prohibition.