Germany: What The European Securities And Markets Authority's (ESMA) Extension To Product Intervention Measures And Its "Summer Findings" Means For Providers And Participants

Last Updated: 26 October 2018
Article by Michael Huertas

Quick Take: 

On August 24, 2018, ESMA announced,1 in its first use of this power, an extension of the existing ban from October 2, 2018 for binary options for those products it has not exempted from the further extension. A corresponding extension to the CFD ban applies from November 1. The impact of these extended bans and the possible rationale in the Summer Findings and any further policy developments are explored in this Client Alert.

As covered in our earlier Client Alert,2 ESMA's use of temporary product intervention powers has had quite an impact on markets.These powers impacted firms by ordering greater disclosure via a standardized risk warning, limiting promotional incentives as well as restricting the sale of certain binary options and contract for differences (CFDs) to investors categorized as "retail clients." This in turn caused a direct impact on those investors' ability to access markets, including those based outside the EU. Both the binary option and the CFD bans were introduced in relation to products that gave rise to a "significant investor protection concern". These measures have also caused a great degree of uncertainty in exactly which instruments were prohibited. This led to these new (temporary) restrictions entering into force at the start of July and August 2018 respectively and being supplemented by revised "questions and answers" which were updated July 12 and on July 30 (the July Q&A), i.e. those July Q&A should be read as a "living document".23

Effects of the ban

The ban has had knock-on effects on a host of arrangements concluded in the wholesale markets but also across the board in the retail markets. This is very much in addition to the increased economic costs due to higher margining requirements imposed on retail clients to enter into these products, or into similar products such as "spread betting".

ESMA was quite late in publishing a press release communicating a renewal of the ban and even later in publishing the Official Notice confirming the extension to the ban; in addition, the details of how the amendments exempting certain binary options from the extended ban would apply was only published on October 1.4 Furthermore, an update to the July Q&A was made available on September 28, 2018 specifically in relation to "rolling spot forex" and the CFD ban in new Q&A 5.12.5 

For investors, inasmuch as providers, the ban is frustrating as, even though one might excuse ESMA for tardiness in exercising its new statutory powers, it raises questions on whether this consumer protection measure was adequately communicated or in a manner permitting providers to treat their customers fairly and in a timely manner. It also raises questions as to when "temporary" product intervention powers cease to be temporary and whether individual national competent authorities in relevant EU Member States may step-up scrutiny on binary options, CFDs and/or similar products.  It is also not yet clear whether ESMA considers that the bans have protected investors, notably where some of these products are used as short-term, effective and easily accessible hedging products for longer-term investment portfolios.   

What now? 

The extended binary option ban commenced on October 2 and runs for a further three-month period. Certain binary options products covered by the original ban are excluded from the extended ban and thus are permitted again. At the time of writing, those "re-habilitated" binary option products include those that:

  • are sufficiently long-term (at least 90 days);
  • have a pay-out profile for which the lower of the two predetermined fixed amounts is at least equal to the total payment made by a retail client for the binary option, including any commissions, transaction fees and other related costs – i.e., the investor incurs no transaction costs loss;
  • are accompanied by a prospectus; and
  • are fully hedged by the provider or another entity within the same group as a provider and that those entities do not make a profit or loss from the binary option other than in terms of transaction fees disclosed to the investor.

If these criteria are met, then ESMA considers these products to be permitted, as they do not lead to a "significant investor protection" concern.  

One of the key issues is that this exemption is in itself only relevant to a handful of products and equally leaves the door open to wide interpretation as to whether standards of disclosure are appropriate.   

The CFD ban applies from November 1, 2018. The new Q&A 5.12 in the September update to the July Q&A clarified that rolling spot forex products are in scope as "A forex derivative which uses the spot price as reference value and automatically rolls over at the end of the contract period and allows a party to terminate the contract other than by reason of default or another termination event is a CFD for the purposes of Article 1(a) of the CFD Decision."

The extended CFD ban also confirms that CFD providers from November 1, 2018 may use a modified short-form standardized risk warning stating that: " [insert percentage per provider] % of retail CFD accounts lose money." in advertisements with a link to a webpage of a provider where the full  long-form standardized risk warning is set out for customers to take note of.

Why now?

The decision to extend the ban, which was taken by the Board of Supervisors during August 2018, may have culminated with decisions to approve the following key documents that make up the "Summer Findings":

  • ESMA's 2nd Edition of its Trends, Risks and Vulnerabilities Report (TRV 2),6 which is the first report of market evolution following the introduction of the EU's MiFID II/MiFIR Regime;
  • ESMA's special focus in the TRV 2 on "Investor protection in Structured Retail Products"7 which found high levels of divergences in products sold and investor protections; and
  • The Joint Committee Report on results of the monitoring exercise on 'automation in financial advice' (the Robo Advisory Report)8 – Robo Advisory often uses binary options and CFD products to build "automated investment portfolios" for retail clients.

With ESMA having to balance its investor protection mandate with the tasks expected of it to contribute to creating a more "single" Single Market for retail client investor market participation as part of delivery of the EU's Capital Markets Union project. Extending the ban, without providing a workable solution or industry-wide improvements is potentially a missed opportunity to deliver on those aims.

Spotlight on the Summer Findings

ESMA's statements in TRV2 concluded that market risk remained high in the second quarter of 2018 and that risks in securities markets remained very high posing elevated risks for investors notably from political and on-going economic uncertainty due also to BREXIT. Overall concern was expressed by the flat performance for investors' holdings from managed funds (active and tracker), exchange traded funds (equity and bond) compared with strong funds for alternative funds (particularly from distressed debt and relative value investments).

Moreover, ESMA noted that while EU household financial asset to liability ratios reached a five-year high, ESMA noted that the levels of complaints regarding investment advice being given in relation to debt securities affected by credit events (including resolution of banks) was a notable development, especially in a number of specific jurisdictions. Another area that the TRV expressed concern on was the marked jump of circuit breaker events that are designed to reduce rapid price movements within a pre-determined price range during periods of high volatility. These jumped to 400 in the week of 5 February 2018 and a sharp equity sell-off and are contrasted with the average in January being 104 per week. Coupled with a rise in settlement failures this posed an area of note.

The comments in the TRV2 also looked at the progress of compliance with the EU's Benchmark Regulation and the move to replacement rates (see our separate coverage from our Eurozone Hub on this).  Of note was that the TRV2 referred to the decision of the ECB's Governing Council on June 28, 2018 to adopt the final methodology to calculate a euro short-term rate (ESTER) which is to be calculated entirely on money market statistical reporting.

The TRV 2 also rated new trends on products and ESMA's view on their levels of investor protection, financial stability and market integrity – this may present some insight as to where ESMA may make use of temporary intervention or any other supervisory powers going forward:

Product Investor Protection  Financial Stability Market Integrity   Comments from ESMA
Virtual currencies
Very High Risk
 High Risk Very High Risk
  • Virtual currencies are largely outside the regulatory perimeter and are subject to extreme price volatility.
  • Most virtual currency exchanges are unregulated and hence prone to market manipulation and operational flaws.
Initial Coin Offerings Very High Risk  High Risk Very High Risk
  • Same concerns as with Virtual Currencies except that some coins or tokens issued have rights attached meaning that they could be less speculative over time.
Distributed Ledger Technology
Medium Risk
Medium Risk Very High Risk
  • Applications are still limited in scope but are scalable;
  • Interoperability and cyber-resilience challenges will require monitoring as technology develops.
  • Anonymity presents significant governance and privacy issues.
 Crowdfunding Very High Risk Medium Risk Very High Risk
  • Projects that are funded have an inherently high rate of failure.
  • Crowdfunding does provide diversified funding channels for start-ups and small businesses.
  • Anonymity of investing through a crowdfunding platform increases the risk of fraud.
 RegTech Medium Risk  Low Risk Medium Risk
  • Widespread adoption of RegTech may in fact reduce certain risks and improve market integrity.
Volatility Exchange Traded Notes (VIX ETNs) Very High Risk Medium Risk Medium Risk
  • Complicated valuations that depend on layers of synthetic exposures, which may make it difficult for investors to understand the risks
  • Long VIX ETNs typically decline in value whereas short VIX ETNS "risk dramatic falls in value" and recent research suggests a potential scope of manipulation of reference prices.

In the context of ESMA's outlook on these products the TRV 2 also looked at the CFD and binary option intervention measures and the terms of the original ban before skipping through other developments to look at the state of play of the EU Structured Retail Products Market. Whilst ESMA notes that the systemic risk in and across the markets remain low, the evolution of the market points to increasing product complexity and that is another potential source of risk.

This comes on top of ESMA's comments in TRV 2 that the breadth of products available may be too much and too fragmented for retail clients to have sufficient clarity as to what they are purchasing and the terms. This is despite efforts, including by the European Structured Investment Products Association to create a more nuanced taxonomy of categorizing products beyond what the regulator has designated as a binary choice between those that are complex and those that are non-complex.

Furthermore, ESMA notes that greater comparability and harmonization of features, payouts and pricing would enable a greater move to delivery on the goals of the EU's Capital Markets Union project. Those comments are not new, but possibly the threat of ESMA intervening where it sees concerns may act as a catalyst for industry, and if not, then by policymakers in legislating the design features of common "basic" products. This would not be the first time that EU financial services policymakers have done this.

The Robo Advisory Report's findings also confirmed that while automation in financial advice seems to be slowly growing and the overall number of firms and customers involved seems to be quite limited, "the risks and benefits of this phenomenon, which had originally been identified in the development of the [2015 Joint Committee Discussion paper on Automation in Financial Advice and the 2016 Report on the same topic], have largely been confirmed by NCAs and seem to be still valid.

Developing trends were concentrated in automated sales and distribution of funds (mutual, AIFs and ETFs) as well as signal following sales of CFDs in securities markets and automated solutions consumer-relevant insurance contracts. Automated solutions were largely being advanced by incumbent financial services providers working together with FinTech firms and some increased use in "chatbots" for customer service engagement.

That being said, the Robo Advisory Report finding did point to the work of ESMA and its sister authorities, EBA and EIOPA where further protection or good standards may be required. Unsurprisingly these all relate to:

  • improved customer disclosure standards as to product, features (incl. charges) and redress options;
  • appropriate assessment of suitability of the solution to a customer and ensuring fair treatment of customer; and
  • robust product governance standards.

Regulatory barriers that were identified as limiting a greater adoption of automated solutions included the lack of a "digital identity" of customers and harmonization of digital procedures for how to identify/verify a customer as well as the lack of a consistent legal definition of what constitutes "advice" across the banking, securities and insurance sector.  Whilst this comment is potentially aimed at the EU Commission, as a longer term step in developing a Capital Markets Union this observation may fall back to the Joint Committee of the European Supervisory Authorities. This is especially the case as these authorities are not only the gatekeeper of this Robo Advisory Report but have also been mandated more generally to finalize regulatory approaches/policy on FinTech.

If that is the case, then these "barriers" are something that would only likely be put on the table for discussion from mid to late 2019 onwards and it is unclear whether market participants generally would be able to participate, or as fully, in shaping pragmatic solutions. While ESMA and its sister authorities concluded that no immediate supervisory or rulemaking action appears to be necessary, they confirmed that a new monitoring exercise "...will be done if and when the development of the market and market risks warrant this work." This would mean that incumbent financial services firms and those FinTech players could be left with an undesirable state of fragmentation in the interim and specifically in an area where harmonization would otherwise advance one further area of the EU's aims at reinvigorating its Capital Markets Union project.

Outlook and next steps

ESMA's extension of its temporary intervention powers marks an important moment in the targeted use of these new powers. In many ways, it, along with the Summer Findings, conveys a much stronger message in that supervisory scrutiny may focus on not only how products are sold but how the governance in the product design and approval focus, which is an area that the EU's MiFIR/MiFID II Regime had already reformed. The Robo Advisory Report, while highlighting identified barriers, may however yield some opportunities for certain market participants to develop or expand solutions that can bridge gaps in a meaningful manner ahead of further legislative action.

If you would like to receive more coverage in respect of these developments and the breadth of their impacts as well as possible options, then please do get in touch with any of our Eurozone Hub Contacts.


1. See:

2. See:

3. See:

4. See:

5. See:

6. See:

7. See:

8. See:

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
6 Jun 2019, Seminar, Prague, Czech Republic

We cordially invite you to attend a breakfast seminar focusing on issues of bid rigging and private enforcement of competition law.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions