New measures on the provision of contracts for differences ('CFDs') and binary options to retail investors have been formally adopted by the European Securities and Markets Authority ('ESMA') with the aimto further enhance investor protection in the EU.

The measures for binary options will become applicable as from the 2nd of July 2018. These will consist of a prohibition on the marketing, distribution, or sale of such products to retail investors.

The measures concerning CFDs will apply as from the 1st of August 2018, and will entail a restriction on the marketing, distribution, or sale of CFDs to retail investors including the following:

  • Leverage limits on opening positions by a retail client from 30:1 to 2:1. Such limits will vary according to the volatility of the underlying:

    • 30:1 for major currency pairs;
    • 20:1 for non-major currency pairs, gold and major indices;
    • 10:1 for commodities other than gold and non-major equity indices;
    • 5:1 for individual equities and other reference values; and
    • 2:1 for cryptocurrencies;
  • A margin close out rule on a per account basis, in order to standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out a retail client's open CFDs;
  • A negative balance protection on a per account basis, so as to provide an overall guaranteed limit on retail client losses;
  • A restriction on the use of incentives offered to trade CFDs; and
  • A firm specific risk warning delivered in a standardised way, which is to include the percentage of losses on retail investor accounts.

The said measures are aimed to ensure that investors are provided with comprehensible risk warnings, restrict the usage of incentives and leverages, and prevent investors from losing more capital than they put in.

MiFIR grants ESMA the power to introduce temporary intervention measures on a trimonthly basis. At the end of three months from the date of application, these product intervention measures will be reviewed by ESMA, who will consider whether to extend these for a further three months.

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