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Author: Anatol Antonovici
Senior Reporter
Anatol Antonovici

ESMA Extend CFD-Related Restrictions Again

On Tuesday, the European Securities Markets Authority (ESMA) announced another update of its restrictions related to contracts for difference (CFDs) across the European Union (EU). This is the third extension of its CFD-oriented rules since the new regulatory framework aimed at retail brokers was introduced in August 2018.

The current amendment of ESMA is encouraging national regulators, like the Autorité des Marchés Financiers (AMF) in France or the CySEC in Cyprus, to implement the measures on a permanent basis in order to protect consumers. Since the time when the new regulations were adopted last August, they have had a temporary status. The current extension, which took effect on Wednesday, is for another period of three months. The ESMA stressed that the datasets provided from national regulators have been in line with the targeted effects of the framework.

Interestingly, several national regulators have already implemented permanent measures, including Germany’s BaFin, UK FCA, and Netherlands’ AFM. The French AMF is also thinking about making the ESMA restrictions permanent.

Poland might create a new group of investors that will be positioned between professional and retail traders. As for other countries, few of them have openly expressed their positions, but it seems that the majority of companies operating in the EU will consider the regulatory framework imposed by ESMA.

According to ESMA’s Tuesday statement, the decision to renew the restriction on the promotion, distribution and sale of CFDs was taken on April 17, 2019. The current extension hasn’t changed from the previous two renewals.

ESMA Imposes Brokers to Warn Traders About Risks

The pan-European regulator requires brokers to inform consumers on potential risks when trading CFDs. The regulator notes that CFDs are complex instruments and come with a high risk due to the leverage. The ESMA stated that between 74% and 89% of retail trader accounts lose money when trading these instruments. These figures should be included in the risk warning that could be easily spotted by investors.

According to the Article 2 of the ESMA Decision (EU) 2018/796, the marketing, distribution or sale of CFDs to retail traders is restricted to the circumstance where at least all of the conditions below are met:

  • The CFD broker requires the retail trader to pay the initial margin protection
  • The CFD broker ensures that the retail client has margin close-out protection
  • The CFD broker provides the client with negative balance protection
  • The CFD provider doesn’t provide the trader with payment or any monetary benefit related to the marketing, distribution or sale of a CFD instrument
  • The CFD broker doesn’t send any communication or publish information accessible by a trader relating to the marketing, distribution or sale of a CFD unless it mentions the risk warning according to the conditions in Annex II

As for the initial margin value, it varies depending on the underlying asset. Thus, the initial margin in the case of pairs made up of USD, EUR, JPY, GBP, CAD, and CHF should be 3.33% of the notional value of the CFD. The margin increases to 5% when the underlying asset is a major stock index (like NASDAQ, FTSE 100 or DAX30), gold, or a Forex pair that includes a currency besides the ones mentioned above. In the case of cryptocurrencies, the initial required margin is 50%.

EU Traders Look For Foreign Brokers

Given that the European regulator is continuing with its tight measures, retail traders are considering broker from countries outside the EU. Thus, the Australian Securities and Investment Commission (ASIC) has stressed in its communications with local brokers that it requires a legal opinion on how to handle the process of registering EU clients.

Besides Australia, many European clients also trade with Swiss brokers, which provide up to 1:100 leverage.

Meet The Author
Anatol Antonovici
Anatol Antonovici
Senior Reporter

Anatol has been writing for our news site for a year and is the newest member of our team. While he’s new to us, he’s certainly not new to trading with over 10 years’ experience being a professional financial journalist and working in the markets.

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