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ESMA publishes updated Q&A on CFDs and other speculative products

25 July 2016

The European Securities and Markets Authority (ESMA) has published today an updated version of its question and answer document (Q&A) on the application of the Markets in Financial Instruments Directive (MiFID) to the marketing and sale of financial contracts for difference (CFDs) and other speculative products to retail clients (such as binary options and rolling spot forex).

The Q&A includes 9 new questions and answers in sections 3 to 5, which address the following topics:

  • The information provided to clients and potential clients about how CFDs and other speculative products work and the risks involved, including marketing communications;
  • The assessment of a retail client or potential retail client’s ability to understand the risks involved in order to determine whether trading in CFDs or other speculative products is appropriate for them; and
  • Factors for supervisors to consider when firms offering CFDs or other speculative products to retail clients enter into certain commercial arrangements with other authorised firms.

The complexity of CFDs and other speculative products means it may be difficult for the majority of retail investors to understand the risks involved although they are widely advertised to the retail mass market by a number of firms, often via online platforms. There is also a considerable degree of cross-border activity across Europe in these products. Many competent authorities have concerns about the protection of investors in this area and the purpose of the Q&A is to promote common supervisory approaches and practices in the application of MiFID and its implementing measures to key aspects that are relevant when CFDs and other speculative products are sold to retail clients.

Next steps

ESMA will continue to work on this topic and aims to publish further Q&As in the coming months. ESMA will also consider the need for any further work, in the medium term, in light of MiFID II requirements.

The Q&As are targeted at competent authorities. However, the answers are also intended to help firms by providing clarity on MiFID rules.