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Product Intervention

Product Intervention

ESMA’s power to temporarily restrict or prohibit the marketing, distribution or sale of financial products has been applicable from 3 January 2018 as part of a strengthening of investor protection introduced by the new MiFID regime.

ESMA currently has two product intervention measures in effect under Article 40 of the Markets in Financial Instruments Regulation (MiFIR). 

    The new powers came into effect on 3 January 2018

    Product Intervention powers became available on 3 January 2018, the date of the entry into application of the Markets in Financial Instruments Regulation No 600/2014 (MiFIR).

    WHO HAS PRODUCT INTERVENTION POWERS?

    ESMA, under Article 40 of MiFIR, and National Competent Authorities (NCAs), under Article 42 of MiFIR, have intervention powers.

    The other two European Supervisory Authorities, the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) and their NCAs, will also have intervention powers under MiFIR for EBA and PRIIPs for EIOPA. The entry into application of the intervention powers for these authorities was also January 2018.

    WHAT ARE THE FINANCIAL PRODUCTS THAT CAN BE SUBJECT TO AN INTERVENTION?

    Products that can be subject to a prohibition or restriction are financial instruments as defined in MiFID such as shares, bonds, funds (UCITS funds or alternative investment funds), derivatives etc.

    In addition, a prohibition or restriction on a type of financial activity or practice can be imposed.

    ENTITIES

    Product Intervention measures apply to any person marketing, distributing or selling financial instruments.  This includes investment firms and banks.

     

    Permanent and temporary powers

    NCAs, under Article 42 of MiFIR, have the power to permanently prohibit or restrict the marketing, distribution or sale of financial instruments or a type of financial activity or practise. When National Competent Authorities intend to take product intervention measures they have to notify ESMA. ESMA shall adopt an opinion on whether the prohibition or restriction is justified and proportional and shall publish it on its website.

    ESMA can only adopt temporary product intervention measures. MiFIR gives ESMA the power to introduce temporary intervention measures for a period of three months. Before the end of the three months, ESMA must review the product intervention measures and consider the need to extend them for a further three months. There is no limit to the number of times ESMA could renew product intervention measures. If ESMA does not renew the measures they will expire. 

    WHAT ARE THE CONDITIONS TO BE MET FOR THE ADOPTION OF A MEASURE BY ESMA?

    The issue raises either:

    • A significant investor protection concern; or
    • A threat to the orderly functioning and integrity of financial markets or commodity markets; or
    • A threat to the stability of the whole or part of the financial system.

    And:

    • No regulatory requirements under Union law that are applicable to the financial instrument or activity do address the threat/concerns mentioned above; and
    • No National Competent Authority or National Competent Authorities have taken action to address the problem or the actions taken do not adequately address the problem.

    PRODUCT INTERVENTION MEASURES CURRENTLY IN EFFECT

    On 27 March 2018 ESMA agreed on temporary product intervention measures on the provision of Contracts for Differences and Binary Options to retail clients. These measures were formally adopted by ESMA on 1 June 2018.  

    Binary Options 

     

    Since 2 July 2018, a prohibition on the marketing, distribution or sale of binary options to retail clients. ESMA’s Decisions describe the relevant evidence in relation to the provision of binary options to retail clients. A timeline with links to relevant documents and announcements can be found below. 

     

    Timeline

     

    - 27 March 2018 – ESMA agrees on temporary product intervention measures.

    - 1 June 2018 – ESMA formally adopts product intervention measures.  

    - 2 July 2018 – Prohibition takes effect for three months. 

    - 24 August 2018 – ESMA agrees to renew prohibition for a further three months, excludes a limited number of products from the scope of the measures.   

    - 21 September 2018 – ESMA formally adopts renewal of the product intervention measures

    - 2 October 2018 - Prohibition takes effect for three months. 

    - 9 November 2018  – ESMA agrees to renew prohibition for a further three months 

    - 2 January 2019 – Prohibition takes effect for three months

    - 18 February 2019 – ESMA agrees to renew prohibition for a further three months 

    - 2 April 2019 – Prohibition takes effect for three months

     

    Contracts for Differences (CFDs) 

     

    Since 1 August 2018 a restriction on the marketing, distribution or sale of CFDs to retail investors is in effect.  

    This restriction consists of:

    leverage limits on the opening of a position between 30:1 and 2:1, which vary according to the volatility of the underlying asset:

     

    - 30:1 for major currency pairs;

    - 20:1 for non-major currency pairs, gold and major equity indices;

    - 10:1 for commodities other than gold and non-major equity indices;

    - 5:1 for individual equities and any underlying not otherwise mentioned;

    - 2:1 for cryptocurrencies;

     

    a margin close-out rule on a per account basis;

    a negative balance protection on a per account basis;

    a prohibition on benefits to incentivising trading; and

    a standardised risk warning.

     

    ESMA’s Decisions describe the relevant evidence in relation to the provision of contracts for differences to retail clients. 

     

    A timeline with links to relevant documents and announcements can be found below. 

     

    Timeline

     

    - 27 March 2018 – ESMA agrees on temporary product intervention measures.

    - 1 June 2018 – ESMA formally adopts product intervention measures. 

    - 1 August 2018 – Restriction takes effect for three months.  

    - 28 September 2018 - ESMA agrees to renew restrictions for a further three months.

    - 23 October 2018 – ESMA formally adopts renewal product intervention measures

    - 1 November 2018 – Restriction takes effect for three months. 

    - 19 December 2018 - ESMA agrees to renew restrictions for a further three months.

    - 1 February 2019 – Restriction takes effect for three months.

    - 27 March 2019 -  ESMA agrees to renew restrictions for a further three months.

    - 1 May 2019 – Restriction to take effect for three months.

     

    LEGAL

    Product Intervention powers became available on 3 January 2018, the date of the entry into application of the Markets in Financial Instruments Regulation No 600/2014 (MiFIR).

    ESMA’S OPINIONS ON NATIONAL PRODUCT INTERVENTION MEASURES

    National competent authorities (NCAs) may take product intervention measures in accordance with Article 42 of the Markets in Financial Instruments Regulation (EU) No 600/2014 (MiFIR). At least one month before a measure is intended to take effect, an NCA must notify all other NCAs and the European Securities and Markets Authority (ESMA) of the details of its proposed measure and the related evidence, unless there is an exceptional case where it is necessary to take urgent action. 

    In accordance with Article 43 of MiFIR, ESMA performs a facilitation and coordination role in relation to such product intervention measures taken by NCAs. After receiving notification from an NCA of its proposed measure, ESMA must adopt an opinion on whether the proposed measure is justified and proportionate. In doing so, ESMA takes into account the potential cross-border effects of such measures. For example, where a financial market participant established in one Member State provides services to a client located in another Member State, ESMA takes into account the potential interaction of the two national measures and that clients benefit from the protections offered by the stricter of those two measures applicable to those services.  This holds that if Member State (MS) A adopts stricter measures than MS B, then firms from MS B still have to abide by the national product intervention measures of MS A in respect of any cross-border activity provided to clients in MS A that is within the scope of the national measures of MS A. If ESMA considers that the taking of a measure by other NCAs is necessary, it must state this in its opinion. 

    ESMA must publish its opinions on national product intervention measures on its website. 

     

    ESMA OPINIONS ON NCA PROPOSED PRODUCT INTERVENTION MEASURES

    13 June 2019 The Commissione Nazionale per le Società e la Borsa of Italy Opinion on the proposed product intervention measure relating to binary options
    13 June 2019 The Commissione Nazionale per le Società e la Borsa of Italy Opinion on the proposed product intervention measures relating to contracts for differences
    13 June 2019 The Comissão do Mercado de Valores Mobiliários of Portugal Opinion on the proposed product intervention measure relating to binary options
    13 June 2019 The Comissão do Mercado de Valores Mobiliários of Portugal Opinion on the proposed product intervention measures relating to contracts for differences
    13 June 2019 The Central Bank of Ireland Opinion on the proposed product intervention measure relating to binary options
    13 June 2019 The Central Bank of Ireland Opinion on the proposed product intervention measures relating to contracts for differences
    13 June 2019 The Commission de Surveillance du Secteur Financier of Luxembourg Opinion on the proposed product intervention measure relating to binary options
    13 June 2019 The Commission de Surveillance du Secteur Financier of Luxembourg Opinion on the proposed product intervention measures relating to contracts for differences
    5 June 2019 The Česká Národní Banka of the Czech Republic Opinion on the proposed product intervention measure relating to binary options
    5 June 2019 The Finantsinspektsioon of Estonia  Opinion on the proposed product intervention measure relating to binary options
    5 June 2019 The Finantsinspektsioon of Estonia  Opinion on the proposed product intervention measures relating to contracts for differences
    5 June 2019 The Národná Banka Slovenska Opinion on the proposed product intervention measure relating to binary options
    5 June 2019 The Národná Banka Slovenska Opinion on the proposed product intervention measures relating to contracts for differences
    23 May 2019 Comisión Nacional del Mercado de Valores of Spain Opinion on the proposed product intervention measures relating to binary options
    23 May 2019 the Bank of Lithuania Opinion on the proposed product intervention measures relating to contracts for differences
    23 May 2019 the Bank of Lithuania Opinion on the proposed product intervention measures relating to binary options
    14 May 2019 the Finanssivalvonta of Finland Opinion on the proposed product intervention measures relating to contracts for differences
    14 May 2019 the Finanssivalvonta of Finland Opinion on the proposed product intervention measures relating to binary options
    3 May 2019 Financial Market Authority of Austria Opinion on the proposed product intervention measures relating to binary options
    3 May 2019 Financial Market Authority of Austria Opinion on the proposed product intervention measures relating to contracts for differences 
    26 March 2019 the Financial Conduct Authority of the United Kingdom Opinion on the proposed product intervention measures relating to binary options 
    26 March 2019 Authority for the Financial Markets of the Netherlands Opinion on the proposed product intervention measures relating to binary options
    26 March 2019 Authority for the Financial Markets of the Netherlands Opinion on the proposed product intervention measures relating to contracts for differences  
    26 March 2019 Komisja Nadzoru Finansowego of Poland   Opinion on the proposed product intervention measures relating to binary options