ESMA prohibits binary options and restricts CFDs to protect retail investors

Of relevance to: All firms providing contracts for differences and/or binary options to retail investors
Key date: Applicable from two months, for CFDs, and one month, for binary options, after their publication in the Official Journal of the EU ‘in the coming weeks’

The European Securities and Markets Authority (“ESMA”) has announced temporary product intervention measures restricting the marketing, distribution or sale of contracts for differences (“CFDs”) to retail investors in the European Union (“EU”) and banning the marketing, distribution or sale of binary options to retail investors in the EU.

ESMA’s product intervention measures will be applied to the provision of CFDs including rolling spot forex and financial spread bets, and binary options to retail investors.  The Financial Conduct Authority supports ESMA’s application of EU-wide temporary product intervention measures and expects to consult on whether to apply these measures on a permanent basis.

This is the first time ESMA has used the new product intervention powers afforded to it under the Markets in Financial Instruments Regulation (“MiFIR”) and follows a Call for Evidence in January 2018 on potential product intervention measures on contracts for differences and binary options to retail investors. It may set the tone for further crackdowns on other leveraged instruments.

CFDs that offer leveraged exposure to price, level or value changes in underlying asset classes and have existed as a speculative short-term investment product provided to a niche client base in some EU jurisdictions for several years.

However, in recent years, concerns have been raised about the widening distribution of CFDs to a mass retail market, despite the products being complex and deemed inappropriate for the large majority of retail investors.

The measures will be published in the Official Journal of the EU in ‘the coming weeks’ and will start to apply, for binary options, one month later and, for CFDs, two months later. Under MiFIR, ESMA can only introduce temporary intervention measures on a three monthly basis. Before the end of the three months, ESMA will consider the need to extend the intervention measures for a further three months.

Binary Options – agreed measure
  • A prohibition on the marketing, distribution or sale of binary options to retail investors.

ESMA believes the prohibition is needed to protect investors due to the products’ characteristics, most notably the combination of the promise of high returns and easy-to-trade digital platforms which, in an environment of historical low interest rates, has created an offer that appeals to retail investors.

CFDs – agreed measures
  • A restriction on the marketing, distribution or sale of CFDs to retail investors.

The restrictions announced by ESMA include:

  1. Leverage limits on the opening of a position by a retail investor 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% of minimum initial required margin) at which providers are required to close out one or more of a retail investor’s open CFDs;
  3. Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail investor losses;
  4. A restriction on the incentives offered to trade CFDs; and
  5. A firm-specific risk warning, including the percentage of losses on a CFD provider’s retail investor accounts, delivered in a standardised way.
Significant Investor Protection Concern

ESMA, along with National Competent Authorities (“NCAs”), has concluded that there exists a significant investor protection concern in relation to CFDs and binary options offered to retail investors due to:

  • their complexity and lack of transparency;
  • the particular features of CFDs – excessive leverage – and binary options – structural expected negative return and embedded conflict of interest between providers and their clients;
  • the disparity between the expected return and the risk of loss; and
  • issues related to their marketing and distribution.

ESMA and these NCAs have identified the marketing, distribution and sale through on-line channels and the associated aggressive marketing techniques used by a number of firms have led to significant investor protection concerns.

NCAs’ analyses on CFD trading across different EU jurisdictions shows that 74-89% of retail accounts typically lose money on their investments, with average losses per client ranging from €1,600 to €29,000. NCAs’ analyses for binary options also found consistent losses on retail investors’ accounts.

ESMA’s Chair, Steven Maijoor, says that the new measures on CFDs will ensure that investors cannot lose more money than they put in.

ESMA also concludes that the inherent complexity of the products and, in the case of CFDs, their excessive leverage, has resulted in significant losses for retail investors.


All relevant firms should read the details in the Additional Information as some of the measures have quite onerous implications.

For example, the standardised risk warning and basis for calculation and publication of percentage of retail CFD accounts that lost money over the last 12 months is relatively simple to calculate for established firms.

Those firms without a 12-month track record or no activity on accounts during a 12-month calculation period will have to publish the 74-89% range of losses found by the NCAs in their analysis.

This could impact a firm that has not yet launched as the ‘generic’ percentage will probably be higher than that of already regulated firms with ‘live’ data, causing a client to believe they would be worse off with the new firm.