Shearman & Sterling LLP | FinReg | Firms Criticized for Non-Compliance with the EU Contracts For Difference Product Intervention Measures
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  • Firms Criticized for Non-Compliance with the EU Contracts For Difference Product Intervention Measures
    07/11/2019
    The European Securities and Markets Authority has published a Statement cautioning contracts for difference providers to comply with its temporary product intervention measure restricting the marketing, distribution or sale of CfDs to retail clients. The measure is due to expire at the end of the day on July 31, 2019, unless ESMA again renews it.

    In its Statement, ESMA states that it has noticed and is concerned that certain firms are not complying with the temporary CfD restriction or any similar permanent national measure. ESMA reminds firms that the temporary CfD restriction does not apply to eligible counterparties or professional clients, including to retail clients who opt to being treated as professional clients, as defined in the revised Markets in Financial Instruments Directive. However, firms must comply with the MiFID II requirements when dealing with a retail client that requests to opt up to being treated as a professional client, including by alerting clients to the loss of protection afforded by the temporary CfD restriction. ESMA also reminds firms that they should not incentivize a retail client to become a professional client by using language that promotes the status or benefits of professional clients.

    Furthermore, ESMA is concerned that some firms are using third-country firms to circumvent the temporary CfD restriction by, for example, advertising on their website the possibility for a retail client to move their account to another group entity outside of the EU. ESMA warns that the reverse solicitation exemption for third-country firms would not apply where the third-country entity has marketed its CfD products or services to the retail client.

    ESMA confirms that it and national regulators will continue to monitor compliance of the temporary CfD restriction and will assess whether further action is needed to address the issues raised in its Statement.

    ESMA announced on July 1, 2019, that it would not renew its ban on the marketing, distribution or sale of binary options to retail clients in the wake of permanent national measures being implemented. To date, ESMA has given no indication that it intends to do the same in respect of its temporary CfD restriction. However, certain national regulators are implementing permanent CfD measures, such as the U.K. Financial Conduct Authority's new rules for CfD and CfD-like options that will apply from August 1, 2019, and September 1, 2019, respectively.

    View ESMA's Statement.

    View details of the temporary CfD restriction.

    View details of the U.K.'s CfD product intervention measures.

    View details of ESMA's announcement of the lift of its ban for binary options.

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