The UK Financial Conduct Authority (“FCA”) and the European Securities and Markets Authority (“ESMA”) just recently announced that they will impose regulatory changes in order to prohibit the offering of binary options and to restrict the provision of Contracts- for-Difference (“CFDs”) in order to protect retail clients.
The new measures will see restrictions on the leverage offered on cryptocurrency CFDs to no more than 2:1. The proposedregulative changes will also mandate that traders provide an initial margin of “50% of the national value of the CFD when the underlying [asset] is a cryptocurrency” – more than twice the initial margin required of any other CFD. Cryptocurrency CFDs allow investors to speculate on a change in price of a cryptocurrency such as Bitcoin or Ethereum and use leverage.
ESMA, along with National Competent Authorities (NCAs), concluded that there exists a significant investor protection concern in relation binary options and CFDs offered to retail investors. This is “due to their complexity and lack of transparency, structural expected negative return and 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.