European Securities and Markets Authority Considers Product Intervention for Contracts for Difference and Binary Options

The European Securities and Markets Authority has issued a call for evidence on the possible use of its product intervention powers under the Markets in Financial Instruments Regulation to impose restrictions and/or prohibitions on the marketing, distribution and sale of contracts for differences and binary options to retail investors. A CFD is a derivative (other than an option, future, swap or forward rate agreement) which gives the holder a long or short exposure to fluctuations in the price, level or value of an underlying, irrespective of whether it is traded on a trading venue. A binary option is a derivative that only provides for payment at its close-out or expiry. Its payment is either: (i) a predetermined fixed amount if the underlying of the derivative meets one or more predetermined conditions; or (ii) zero or another predetermined fixed amount if the underlying of the derivative does not meet one or more predetermined conditions. Both CFDs and binary options must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event. Both CFDs and binary options have given rise to significant investor protection concerns, due to their complexity, the lack of transparent information at the point of sale, the risk of significant loss for investors and the deployment of aggressive marketing techniques by providers and distributors of the products.

The call for evidence follows a statement by ESMA in December 2017, announcing that supervisory convergence work and measures imposed by national regulators in this area had not been enough to control or reduce investor protection concerns.  Under MiFIR, ESMA has the power to impose temporary prohibitions or restrictions on certain financial instruments, financial activities or practices when, among other conditions, the exercise of ESMA's power addresses a significant investor protection concern in the Union. ESMA can exercise its power for renewable temporary periods of up to three months.

ESMA is considering using its product intervention power to impose a complete ban on the marketing, distribution and sale of binary options to retail investors. ESMA considers that any restrictions other than a prohibition would not be sufficient to address the significant investor protection concerns that arise from inherent features in these products, such as the very short duration of binary options contracts and their pricing structure.

ESMA has also long had concerns about the marketing, distribution and sale of CFDs (including rolling spot forex) to retail investors. It proposes a number of restrictions, namely leverage limits (variable, according to the historical price volatility of underlying asset types), a margin close-out rule, negative balance protection, restrictions on the extent to which product providers can offer incentives to would-be investors and a requirement for a standardized risk warning on all communications and information relating to these products. Where the underlying asset for a CFD is a cryptocurrency, however, ESMA is considering more stringent restrictions or even prohibition. ESMA is still conducting work on how cryptocurrencies fit into the MiFID II framework as financial instruments.

Responses to the call for evidence are requested by February 5, 2018. Once finalized, temporary restrictions or prohibitions must be complied with by all market participants in the EU.

The UK Financial Conduct Authority has issued a statement publicising ESMA's call for evidence.

View the ESMA call for evidence.

View the FCA statement on the call for evidence.

View ESMA's December 2017 statement.

View ESMA's Q&A on its MiFIR product intervention powers.