ESMA considers using product intervention powers on speculative retail products


Under Article 40 of the Markets in Financial Instruments Regulation (MiFIR), ESMA can temporarily prohibit or restrict the marketing, distribution or sale of certain financial instruments in order to address investor protection risks. The regulator has been concerned about binary options and CFDs for some time, having established a CFD Task Force in July 2015, and issuing investor warnings and working on supervisory convergence since then. This is however the first time it has threatened to use its Article 40 MiFIR powers, which come into effect from 3 January 2018.

In particular, ESMA is considering measures to:

  • prohibit outright the marketing, distribution or sale to retail clients of binary options; and
  • restrict the marketing, distribution or sale to retail clients of CFDs (including rolling spot forex contracts).

The restrictions on CFDs currently under review are:

  • leverage limits on the opening of a position between 30:1 and 5:1 whose limit will vary according to the volatility of the underlying asset;
  • a margin close-out rule;
  • a negative balance protection to provide a guaranteed limit on client losses;
  • a restriction on benefits incentivising trading; and
  • a standardised risk warning.

Any product intervention measures can have an initial duration of up to three months, but may be renewed.

ESMA will conduct a brief public consultation in January 2018.

The FCA has also released an update on the matter (here), communicating its support for ESMA’s work. Whilst the FCA has been considering its own range of measures for this market (as covered by CMS previously, here), it has now stated that these will align with the ESMA proposals that are eventually adopted. This begs the question of whether that will continue to remain the position post-Brexit, given that the UK has traditionally adopted a more relaxed attitude towards binary options in particular, with the FCA only taking up the regulatory responsibility for these from the Gambling Commission from 3 January 2018.