Ireland: CFDS And Retail Clients: 3-Month Restriction On Marketing, Distribution And Sale

Last Updated: 28 March 2018
Article by Robert Cain and Maedhbh Clancy
Most Read Contributor in Ireland, October 2018

ESMA will restrict the marketing, distribution and sale of CFDs to retail investors for an extendable 3 month period. It will also ban the marketing, distribution and sale of binary options to retail investors for the same, extendable, 3-month period.

This is the first exercise, by ESMA, of its new product intervention powers under MiFIR, and had been signposted by ESMA in its January 2017 Call for Evidence on potential product intervention measures.

Under Article 40 of the Markets in Financial Instruments Regulation (MiFIR), ESMA can temporarily restrict or ban the marketing, distribution or sale of particular financial instruments for various reasons, including investor protection concerns, threats to the financial markets, or threats to the stability of the financial system.

WHAT ARE CONTRACTS FOR DIFFERENCE (CFDs)?

CFDs are complex financial products which allow investors to speculate on short-term movements of underlying reference assets. CFDs are highly leveraged, and investors may be exposed to unlimited losses.

Both ESMA and various national competent authorities (including the Central Bank of Ireland) have issued repeated warnings highlighting the risks that CFDs pose for retail investors, and those who do not have wide-ranging experience of investing in volatile markets. For further information on those warnings, read our previous briefing ( CFDs and Retail Clients).

ESMA will impose 5 key restrictions on the marketing, distribution and sale of CFDs to retail investors.

CFD Restriction 1: Leverage Limit

The first restriction will be a leverage limit on the opening of a position by a retail client, varying from 30:1 to 2:1 depending on the volatility of the underlying asset.

By way of example, the leverage limit where the underlying asset is a cryptocurrency will be 2:1. This means that, on the opening of a CFD with a cryptocurrency as the underlying asset, the retail client will need to post initial margin of 50% of the initial total exposure.

The strictest leverage limit (2:1) will be applied in respect of cryptocurrencies.

Gold, seen as a less volatile underlying asset, will have a leverage limit of 20:1.

CFD Restriction 2: Margin Close-Out Rule

The second restriction will be a margin close-out rule on a 'per account' basis.

Under this rule, if the total margin in an account falls below 50% of the initial margin that was required, the CFD provider must close the account to reduce the risk of loss to the retail investor.

CFD Restriction 3: Negative Balance Protection

The third restriction will be negative balance protection on a 'per account' basis.

This will most likely apply in rare cases where there is a sudden price movement that could cause the protection that is meant to be afforded by the margin close-out rule not coming into effect quickly enough.

In those cases, negative balance protection will operate as a backstop, and will effectively guarantee the limit on the losses that a retail investor will suffer, capping those losses at the total sum invested. CFD Restriction 4: No Incentives

The fourth restriction will prevent CFD providers from offering incentives (monetary and non- monetary benefits) to retail investors to trade CFDs.

ESMA was concerned that such incentives are encouraging retail investors to invest in CFDs where they might not ordinarily have done so.

CFD Restriction 5: Risk Warnings

Communications to retail investors regarding the marketing, distribution or sale of a CFD will also be required to contain an appropriate risk warning.

Each such risk warning must contain the percentage of the CFD provider's retail accounts that have lost money in the previous 12 months.

WHAT ARE BINARY OPTIONS?

Binary options allow an investor to receive a predetermined fixed pay-out if an underlying asset (such as a share) meets certain predetermined conditions, generally within a particular time-frame. They are highly speculative, and ESMA is concerned that retail investors generally lose money on these investments.

Binary Option Prohibition

In light of its concerns, ESMA is prohibiting the marketing, distribution or sale of binary options to retail investors for an extendable 3-month period.

WHAT HAPPENS NEXT?

The above product intervention measures must first be translated into all EU official languages and then published in the Official Journal.

The restriction on CFDs will apply 2 months after publication of the prohibition in the Official Journal.

The prohibition on binary options will apply 1 month after publication of the prohibition in the Official Journal.

Both the restrictions and the prohibition will last for 3 months, following which they may be renewed by ESMA. It seems likely, given the work ESMA has done on this topic, that the restrictions and the prohibition will be renewed on a rolling basis.

The restrictions and the prohibition will apply to all persons that require authorisation under MiFID II to market, distribute or sell CFDs or binary options to retail investors in the EU (this will include banks and investment firms).

The restrictions and the prohibition will be directly applicable in EU Member States, and compliance will be supervised by national competent authorities.

CENTRAL BANK OF IRELAND

The Central Bank has welcomed the new ESMA measures. For the time being, the Central Bank has not introduced measures to restrict or prohibit the marketing, distribution or sale of CFDs to retail investors following its March 2017 Consultation on the Protection of Retail Investors in relation to the Distribution of CFDs, pending ESMA's decision on whether to use its product intervention powers under Article 40 of MiFIR to address retail investor protection concerns in this space.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions