ESMA extends binary options limits

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ESMA extends binary options limits

The European Securities and Markets Authority (ESMA) has agreed on measures on the provision of contracts for differences (CFDs) and binary options to retail investors in the European Union (EU).

The agreed measures include:

1. Binary Options – a prohibition on the marketing, distribution or sale of binary options to retail investors; and

2. Contracts for Differences – a restriction on the marketing, distribution or sale of CFDs to retail investors. This restriction consists of: leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and a firm specific risk warning delivered in a standardised way.

In accordance with 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.

Significant Investor Protection Concern

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. This is 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.

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 clients’ accounts.

These measures were agreed by ESMA’s Board of Supervisors on 23 March 2020.

Steven Maijoor, Chair, said:

“The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors. The new measures on CFDs will for the first time ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide a risk warning for investors. For binary options, the prohibition we are announcing is needed to protect investors due to the products’ characteristics.

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“The combination of the promise of high returns, easy-to-trade digital platforms, in an environment of historical low interest rates has created an offer that appeals to retail investors. However, the inherent complexity of the products and their excessive leverage – in the case of CFDs – has resulted in significant losses for retail investors.

“A pan-EU approach is required given the cross-border nature of these products, and ESMA’s intervention is the most appropriate and efficient tool to address this major investor protection issue.”

CFDs – agreed measures

The product intervention measures ESMA has agreed under Article 40 of the Markets in Financial Instruments Regulation include:

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% 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.

Next steps

ESMA intends to adopt these measures in the official languages of the EU in the coming weeks, following which ESMA will publish an official notice on its website. The measures will then be published in the Official Journal of the EU (OJ) and will start to apply one month, for binary options, and two months, for CFDs, after their publication in the OJ.

ESMA extends binary options limits to July 2020

If you study the structure of the global financial market (more precisely, the segment where operations are carried out online), you can see that over the past decade there have been global changes. And even well-known and reputable economists cannot give them a definite assessment.

Among the most important events that led to global changes in the global financial system are the following:

• The emergence and development of cryptocurrency.

• Practical application of blockchain technology.

• The rapid development of online trading.

• The emergence of new financial instruments and assets (including binary options).

• The unprecedented growth in the volume of speculative operations on the stock exchanges, stock and currency markets.

• Unsuccessful attempts of the countries-leaders of the world economy to create a legislative framework for monitoring the situation on financial markets.

In addition to the above items, it is necessary to remind readers of the previously unprecedented rate of development of fraudulent schemes in the online trading system, as well as unsecured loans. In a stable economy, they do not represent a real threat, and during a crisis – they can play the role of a time bomb. But, of course, we should not forget about the inability of the world economy to independently “balance” the imbalance between a developed and relatively rich Europe, the USA and poor states in Africa, South America and Asia.

Binary options in the EU, how it all began

Retail transactions in financial markets that allow traders to earn income can be divided into several groups (regardless of the specific asset):

1. You work with a decent broker who has licenses of authoritative regulators, own representative offices in many countries and impressive capital, which allows, in case of force majeure situations, to fulfill your financial obligations.

2. The trading floor is inferior in capitalization to the brokers of the previous group, but it enjoys prestige among traders and has a good reputation in the business world. Almost no one guesses that such companies have their own “skeleton in the closet” – in some situations, these brokers do not withdraw clients’ money to the real market. They can be used for short-term (and rather expensive) loans, and when it comes time to pay off investors, the company attracts the financial resources of other clients that help it fulfill its obligations. It is not strange, but such trading platforms work quietly for a long period of time (5-10 years), without fearing that someone will make any claims or charges against them.

3. And the last group – ordinary crooks and scammers. Their main goal is to get as much money as possible and disappear in order to organize a similar project again after a certain time.

Perhaps the readers of this review will not immediately understand why such a long introduction, because there is not a single word about binary options. The fact is that the emergence of this financial instrument from the first days of its existence caused a lot of contradictory reviews, reviews and forecasts. But the fact that brokers and the first and second groups did not refuse to work with binary options, can be considered proof of the legitimacy of such transactions.

Originating many decades ago on the Chicago Stock Exchange, this financial instrument was indeed proof that it gives the right to buy certain assets at a fixed price. These were real stock options. Decent European brokers believed that they would very soon create a market for the assets under consideration. But in fact, everything went wrong (let’s not look for the guilty, just consider the situation as a fait accompli).

In the online trading sector, the popularity of betting (bookmaker) options is growing every day. A simple algorithm for working with them attracts a huge number of users who did not understand what it was and were not going to delve into the essence of the matter. Naturally, small investors daily lost huge sums of money, which made them turn to the regulators so that they “deal with the scammers.” As a result, in July 2020, the ESMA (European Organization of Securities and Markets) granted the request of law-abiding EU citizens.

How was the “struggle” with binary options

Among the main reasons for the prohibition of binary options, the ESMA employees highlight the following:

• Protection of small investors from inevitable losses on operations with BO.

• According to many reputable financiers, such operations have nothing to do with the real economy.

• The unstable economic situation forces many EU citizens to risk the latest savings in order to improve their financial situation with BO.

• The events of 2020 played a significant role, when well-known payment systems refused to cooperate with companies that traded BO, and some countries adopted their own laws prohibiting binary options (Israel, Belgium, France).

• Analysis of the activities of some European trading platforms showed that they are ordinary financial pyramids.

In addition to the BO, ESMA banned the activities of CFD brokers and strongly tightened requirements for leverage transactions.

What can traders planning today to work with?

Starting from July 2020, the ESMA holds meetings every 3 months regarding the future of BW. The leadership of many EU countries do not like this position, many of them argue that in the near future they will adopt their national laws, which will ban financial transactions with binary options forever.

The only indulgences for participants of the BO market were taken last fall, but they affected only long-term operations with minimal financial risk, as well as those market participants who can prove their professionalism in this field of activity. The next meeting of the ESMA will be held in June 2020, and the regulator may finally take a final decision on this issue.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

ESMA extends binary options limits

The European Securities and Markets Authority (ESMA) has formally adopted new measures on the provision of contracts for differences (CFDs) and binary options to retail investors.

The measures have been published in the Official Journal of the European Union (OJ) today. They will start to apply from 2 July 2020 for binary options and from 1 August 2020 for CFDs and will apply as follows:

1. Binary Options (from 2 July 2020) – a prohibition on the marketing, distribution or sale of binary options to retail investors; and

2. Contracts for Differences (from 1 August 2020) – a restriction on the marketing, distribution or sale of CFDs to retail investors. This restriction consists of: leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and a firm specific risk warning delivered in a standardised way.

ESMA has adopted these measures in the official languages of the EU and they will remain in force for a period of three months from the date of application.

Steven Maijoor, Chair, said:

“The measures ESMA has taken today are a significant step towards greater investor protection in the EU. The new measures on CFDs will, for the first time, ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide understandable risk warnings for investors.

“ESMA’s prohibition on the marketing, distribution or sale of binary options to retail investors addresses the significant investor protection concerns caused by the characteristics of this product.

“This pan-EU approach is the most appropriate way to address this major investor protection issue. NCAs will monitor the impact of these measures during their application and will assess, with ESMA, what next steps are required.”

CFDs – measures from 1 August 2020

The product intervention measures ESMA has adopted under Article 40 of the Markets in Financial Instruments Regulation include:

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% 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.

Next steps

MiFIR gives ESMA the power to introduce temporary intervention measures on a three monthly basis. Before the end of the three months, ESMA will review the product intervention measures and consider the need to extend them for a further three months.

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