FCA Statement on the ESMA opinion on the FCA’s final rules for CFDs and CFD-like options

The FCA has published a notice setting out the reasons for acting contrary to ESMA’s Opinion of the FCA’s national product intervention measures restricting how CFDs and CFD-like options are sold to retail consumers.

On 1 July 2019, the FCA published Policy Statement 19/18 and finalised rules that restrict the sale, marketing and distribution of contract for differences (CFDs) and CFD-like options to retail clients in or from the UK.

On 2 July 2019, ESMA published an Opinion concluding that overall the FCA’s proposed national measures were justified and proportionate, with the exception of the FCA’s decision to:

  • Not apply the FCA’s sales and distribution restrictions to CFD-like option providers authorised in other EEA Member States other than a UK branch or tied agent.
  • Setting leverage limits for CFDs referencing certain government bonds to 30:1 (compared to 5:1 under ESMA’s measures).

CFD-like option providers authorised in other EEA Member States

Under the FCA rules, UK retail clients will be able to continue to open accounts to trade unrestricted CFD-like options with product providers established in other EEA Member States (other than through a UK branch or tied agent), provided that these providers have not actively marketed the products in the UK. The FCA did not think it would be proportionate, practical or effective to seek to apply its rules to overseas firms not supervised by the FCA and subject to different rules in their own jurisdiction.

As a result, where a UK-based client contacts an overseas firm on their own initiative, that firm may still sell those products, if they are permitted in their own jurisdiction. CFD-like options are not commonly traded by UK retail consumers, nor are they commonly sold by UK firms.

The FCA is not allowing EEA firms outside the UK to sell CFDs to retail clients in the UK, if a UK retail client approached that firm at their own initiative because there is a greater risk of harm. That is because they are more commonly sold on a cross-border basis and used by UK retail consumers to speculate on financial markets.

30:1 Leverage limits for CFDs and CFD like options referencing certain government bonds

Under FCA rules, UK firms must limit leverage for CFDs and CFD-like options referencing certain government bonds to 30:1 (compared to 5:1 under ESMA’s measures).

In deciding this, the FCA considered firm feedback indicating that 5:1 leverage limits are disproportionate given that the main government bond sare less volatile than more major FX pairs. The feedback also indicated that retail clients who use these products are more likely to use them hedging purposes when compared to CFDs with different underlying assets.

To ensure leverage limits are appropriate and proportionate, the FCA used the methodology ESMA had adopted in setting its leverage limits. Using historical price data, the FCA concluded that a 30:1 leverage limit was consistent with leverage limits set for other asset classes, considering the historic volatility of certain government bond.


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