Warnings and publications for investors

The European Securities and Markets Authority (ESMA) has formally adopted new measures on the provision of contracts for differences (CFDs) and binary options to retail investors.

The measures have been published in the Official Journal of the European Union (OJ) today. They will start to apply from 2 July 2018 for binary options and from 1 August 2018 for CFDs and will apply as follows:

1.    Binary Options (from 2 July 2018) - a prohibition on the marketing, distribution or sale of binary options to retail investors; and

2.    Contracts for Differences (from 1 August 2018) - a restriction on the marketing, distribution or sale of CFDs to retail investors. This restriction consists of: leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and a firm specific risk warning delivered in a standardised way.

ESMA has adopted these measures in the official languages of the EU and they will remain in force for a period of three months from the date of application.

Steven Maijoor, Chair, said:

“The measures ESMA has taken today are a significant step towards greater investor protection in the EU.  The new measures on CFDs will, for the first time, ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide understandable risk warnings for investors. 

“ESMA’s prohibition on the marketing, distribution or sale of binary options to retail investors addresses the significant investor protection concerns caused by the characteristics of this product.

“This pan-EU approach is the most appropriate way to address this major investor protection issue. NCAs will monitor the impact of these measures during their application and will assess, with ESMA, what next steps are required.” 

CFDs – measures from 1 August 2018  

The product intervention measures ESMA has adopted under Article 40 of the Markets in Financial Instruments Regulation include:

1.    Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which 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;

·         2:1 for cryptocurrencies;

2.    A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs;

3.    Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;

4.    A restriction on the incentives offered to trade CFDs; and

5.    A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

Next steps

MiFIR gives ESMA the power to introduce temporary intervention measures on a three monthly basis. Before the end of the three months, ESMA will review the product intervention measures and consider the need to extend them for a further three months.

The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have today published a joint statement encouraging institutions, market and resolution authorities to properly consider retail holders of debt financial instruments subject to the Bank Recovery and Resolution Directive (BRRD) when carrying out their respective tasks. The distribution of debt instruments issued by financial institutions to retail clients may raise significant consumer protection issues and affect the practical application of the resolution framework under the BRRD.

The issue of retail holders of debt financial instruments remains significant considering that, on the basis of the data analysis conducted by EBA and ESMA, retail investors still hold a significant portion of EU debt securities issued by institutions. 

The statement points out that the BRRD does not provide for different treatment of eligible liabilities based on the nature of the holder. Therefore, where there is a material presence of retail debt investors, resolution authorities are encouraged to factor this element into their resolution planning and assessment of possible impediments to resolution.

The EBA and ESMA also call for a cooperative dialogue between resolution and market authorities and the sharing of information when this issue is relevant.

The statement reminds institutions that in relation to:

-          the outstanding legacy stock of issuances of retail debt liabilities, they provide existing clients with complete and updated information on the potential treatment of such investments in resolution or insolvency; and

 

-          new debt financial instruments being issued under the framework of MiFID II, they properly implement the new requirements, which include a number of provisions aiming at strengthening investor protection.

Background

The treatment of retail debt holders in resolution is closely interlinked to consumer protection issues. On this basis, the EBA and ESMA have developed this Statement in order to benefit from the EBA’s prudential role and expertise in resolution and, on from the consumer perspective, from ESMA’s role and expertise on the distribution of financial instruments to investors.

The statement is supported by data analysis assessing the relevance of retail investors as direct holders of debt issued by EU financial institutions, which is largely based on data derived from the ECB securities database.

The European Securities and Markets Authority (ESMA) has been informed that an individual operating under the name “Edward Stewart” has used ESMA’s identity and logo. This individual is presenting himself as an employee of ESMA conducting investigations in order to steal personal data and convince the potential victims to transfer money.

The individual presents himself as an investigator:

EXAMPLE: “My name is Edward Stewart, the one you spoke to yesterday over the phone. This is about the in depth investigation that we are conducting. Our investigation started off 2 Years and 3 Months ago…”

He asks for personal data:

EXAMPLE: “Now if you can provide us any proof such as receipts, or declaration of deposits…”

He signs off as an employee of ESMA, using a fabricated ESMA e-mail signature:

EXAMPLE: “Sincerely yours,

Edward Stewart

Contact Number +33975181294

Investors Protection and Intermediaries 

Standing Committee Department”

 

ESMA has already lodged a complaint before the French police regarding this matter.

Please note that all references to ESMA or its employees in these communications, which do not originate from ESMA, are entirely false and have been made without ESMA’s knowledge or consent.

In order to protect yourself against these unauthorised communications, ESMA advises you:

-        To check whether the e-mail received is genuine;

-        To inform your superior in case of suspicious e-mails;

-        To contact ESMA if any suspicion arises; and

-        To contact the police.

Be aware that fraudsters might use ESMA’s name, logo or the name of an ESMA staff member, a bogus website which appears to be that of ESMA, and/or make bogus references to people said to work in ESMA. Be aware of the following when making your checks:

-        ESMA is a European Supervisory Authority established by a Regulation of the European Parliament and of the Council;

-        ESMA is based in Paris, France and has no affiliates or branch offices elsewhere;

-        ESMA’s emails end with the address @esma.europa.eu; and

-        ESMA’s telephone number begins with the prefix +33 for France, no other prefix is valid.

ESMA’s official website can be found at https://www.esma.europa.eu.

The European Securities and Markets Authority (ESMA) has issued a statement updating on its work in relation to the sale of contracts for differences (CFDs), binary options and other speculative products to retail investors.

 

Statement on preparatory work of the European Securities and Markets Authority in relation to CFDs and binary options offered to retail clients

The European Securities and Markets Authority (ESMA) is issuing this statement to provide an update on its work in relation to the provision of contracts for differences (CFDs), including rolling spot forex, and binary options to retail clients. 

ESMA has been concerned about the provision of speculative products such as CFDs, including rolling spot forex, and binary options to retail clients for a considerable period of time and has conducted ongoing monitoring and supervisory convergence work in this area. Some competent authorities have also adopted national measures to limit the provision of these products to retail clients.

Notwithstanding these actions, ESMA remains concerned that the risks to investor protection are not sufficiently controlled or reduced. Further to the ESMA statement published in June 2017[1], ESMA is considering the possible use of its product intervention powers under Article 40 of MiFIR[2] to address these investor protection risks. In particular, ESMA is considering measures to:

1.    prohibit the marketing, distribution or sale to retail clients of binary options; and

2.    restrict the marketing, distribution or sale to retail clients of CFDs,  including rolling spot forex.

The restrictions on CFDs currently under review are:

·         leverage limits on the opening of a position between 30:1 and 5:1, whose limit will vary according to the volatility of the underlying asset;

·         a margin close-out rule;

·         negative balance protection to provide a guaranteed limit on client losses;

·         a restriction on benefits incentivising trading; and

·         a standardised risk warning.   

ESMA will conduct a brief public consultation in January 2018 on this matter.

Any product intervention measure adopted by ESMA under Article 40 of MiFIR can have an initial duration of up to three months and is renewable.

 

[1] ESMA35-36-885 Statement on preparatory work of the European Securities and Markets Authority in relation to CFDs, binary options and other speculative products published 29 June 2017 (https://www.esma.europa.eu/document/product-intervention-general-statement).

[2] Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012, OJ L 173, 12.6.2014, p. 84–148.

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