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March 28, 2018

EU Markets Watchdog Clamps down on CFDs, ‘Binary’ Options

Alaric Securities

European Union financial markets watchdog the European Securities and Markets Authority (ESMA) announced plans on Tuesday to ban ‘binary’ options sales to retail investors and restrict the sales of Contract for Differences. (CFD)

It said it was prohibiting the marketing, distribution and sale of binary options to retail investors, while its restrictions on CFDs would affect the marketing, sale and distribution of them.

The CFD moves will include leverage limits, margin close out rules and a ‘negative balance protection’ on a per account basis as well a requirement for firms who sell them to provide specific warnings of their risks.

Binary options and CFDs are financial products that give an investor exposure to price movements in securities without actually owning the underlying assets such as a currency, commodity or stock.

“ESMA, along with National Competent Authorities (NCAs), concluded that there exists a significant investor protection concern in relation to CFDs and binary options offered to retail investors,” it said in a statement. “This is due to their complexity and lack of transparency.”

ESMA has said it has been concerned about how these inherently high-risk speculative products are offered to retail investors, potentially leading to significant losses and in December flagged plans to ban their sale, sending shares of spreadbetting firms tumbling.

Shares in IG Group, CMC Markets and Plus 500 reversed course after early trading and were up between 0.1 and 3.4 percent by 0740 GMT.

“ESMA proposals remain broadly unchanged from the statement last year. Overall the emergence of regulatory clarity should be a positive, given the overhang that has persisted for some time,” Peel Hunt analysts said.

Reporting by Marc Jones and Noor Zainab Hussain, editing by Louise Heavens

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