The European Securities and Markets Authority (ESMA) has agreed to renew the restriction on the marketing, distribution or sale of contracts for differences (CFDs) to retail clients, in effect since 1 August, from 1 February 2019 for a further three-month period.
ESMA has carefully considered the need to extend the intervention measure currently in effect. ESMA considers that a significant investor protection concern related to the offer of CFDs to retail clients continues to exist. It has therefore agreed to renew the measure from 1 February 2019 on the same terms as the previous renewal decision that started to apply on 1 November 2018.
The renewal was agreed by ESMA’s Board of Supervisors on 18 December 2018 and includes renewing the following:
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 per cent 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. The standardised risk warning will continue to allow use of the additional abbreviated risk warning introduced in the previous renewal decision for cases where the standard terms of a third party marketing provider have a character limit which is lower than the number of characters comprising the full or the abbreviated risk warning, provided that the advertisement also links to a webpage of the provider on which the full risk warning is disclosed.
ESMA intends to adopt the renewal measure in the official languages of the EU in the coming weeks, following which ESMA will publish an official notice on its website. The measure will then be published in the Official Journal of the EU and will start to apply from 1 February 2019 for a period of three months.
The Bank of England meanwhile, has welcomed the adoption of temporary equivalence decisions by the European Commission on the future UK legal and supervisory framework for CCPs and CSDs.
The implementing acts adopted by the Commission are necessary to allow UK CCPs and CSDs to be recognised by the European Securities and Markets Authority (ESMA). In a no-deal Brexit scenario they would come into effect from 30 March 2019. Recognition would allow UK CCPs to continue to provide clearing services to their EU members, and EU banks to meet their obligations to UK CCPs.
The Bank of England says this is a crucial and positive step which provides necessary clarity and addresses one of the most important financial stability risks associated with the UK’s withdrawal from the EU.
It also enables UK CSDs to be recognised so that they can continue providing notary and settlement services for securities issued under EU law.
In the UK, HM Treasury and the Bank of England have already put in place a temporary recognition regime for non-UK CCPs and a transitional regime for non-UK CSDs. These will enable EU CCPs and CSDs to continue to provide services in the UK in a no-deal Brexit scenario.
The practical arrangements to implement these equivalence decisions now need to be put in place. This includes agreeing the necessary cooperation and information-sharing arrangements between the Bank and ESMA. The Bank has already confirmed to ESMA that it will provide information in line with its current obligations and those set out in the equivalence decisions.
