For several years the European Securities and Markets Authority (ESMA) has been frowning at the burgeoning market which provides Contracts for Differences (CFDs) to retail investors. ESMA’s mounting concerns have ultimately led to its exercise of new powers under which it will impose temporary measures to restrict the sale of CFDs. CFDs have caused concern to regulators because of 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 along with the issues related to their marketing and distribution. In short, ESMA was concerned that retail customers were trading in CFD products they did not adequately understand, a view also shared by the UK’s Financial Conduct Authority (FCA).
ESMA’s product intervention measures are:
- Negative balance protection on a per account basis;
- Margin Close Out rule of 50% on a per account basis;
- Imposition of leverage limits;
- Standardised risk warning;
- Restriction on incentivisation of trading.
ESMA plans to assess the impact of these measures after three months, although it is a widespread view that CFD firms will have to comply with them for the foreseeable future.