Reed Smith Client Alerts

On 27 March 2018, the European Securities and Markets Authority (ESMA) announced that it intended to impose temporary measures to restrict the sale of Contracts for Differences (CFDs) to retail investors.1 This action is the result of ESMA’s Consultation and call for evidence issued on 18 January 2018.2  (See Reed Smith client alert dated 29 January 2018 on the Consultation). The temporary restrictions are likely to take effect from late June/early July 2018. 

Authors: David Calligan Simon G. Grieser Daniel Kadar Vaibhav Adlakha

What are CFDs and why have they caused concern?

ESMA’s Consultation in January related to the sale, distribution and marketing of CFDs and binary options to retail investors. It was felt that the proliferation of these products posed a threat to retail investors. What came to be known as the ‘Significant Investor Protection Concern’ related to the fact that CFDs were complex and lacked transparency. The particular points of concern regarding CFDs are excessive leverage, structural expected negative return, embedded conflict of interest between providers and their clients, disparity between the expected return and the risk of loss as well as the issues related to their marketing and distribution. In the UK, the FCA was also concerned that retail customers were opening and trading CFD products that they did not adequately understand. In ESMA’s view, these concerns merited intervention to provide greater protection, especially since losses can often exceed the money invested.