Shearman & Sterling LLP | Financial Regulatory Developments Focus | European Securities and Markets Authority Adopts First Product Intervention Measures for Contracts for Difference and Binary Options
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  • European Securities and Markets Authority Adopts First Product Intervention Measures for Contracts for Difference and Binary Options
    06/01/2018
    The European Securities and Markets Authority has adopted two Decisions on the provision of Contracts for Difference and binary options to retail investors. The effect of the Decisions is to prohibit the marketing, distribution and sale of binary options to retail investors and to impose a number of restrictions on the marketing, distribution and sale of Contracts for Difference to retail investors. Both CFDs and binary options are considered to 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.

    In issuing these Decisions, ESMA has exercised for the first time its powers under the Markets in Financial Instruments Regulation to impose temporary prohibitions or restrictions on certain financial instruments, financial activities or practices. This may be done when, among other conditions, the exercise of ESMA's power addresses a significant investor protection concern in the Union. ESMA can exercise this power for renewable temporary periods of up to three months. Product intervention measures imposed by ESMA under MiFIR must be reviewed at appropriate intervals and at least every three months. If a measure is not renewed after three months, it will expire. ESMA announced these product intervention measures for CFDs and binary options in March 2018.

    The Decision relating to binary options enters into force on July 2, 2018 and the Decision relating to CFDs enters into force on August 1, 2018.

    Alongside the publication of its two Decisions, ESMA has issued updated Q&A to promote common, uniform and consistent supervisory approaches and practices in the day-to-day application of the measures. The updated Q&A cover the treatment of existing contracts, payments (for the purposes of entering into a CFD), margin close-out protection, aggregate liability, monetary benefits, binary options, CFDs referencing futures and guaranteed stop loss orders.

    View the Decision on temporary restrictions for CFDs.

    View the Decision on temporary prohibition for binary options.

    View the ESMA Q&A.

    View details of ESMA's Announcement in March 2018.

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