The European Securities and Markets Authority (ESMA) has introduced some regulatory changes to protect retail investors from binary options and CFDs.
The measures were launched in the light of some analyzes carried out by the various European national authorities, which demonstrated that these financial instruments cause on average significant losses to the retail public.
BAN FOR BINARY OPTIONS
The first change is the ban on the sale of binary options to retail investors. These are instruments closer to the world of gambling than to that of finance, as at maturity they have a balance with only two alternatives: null if the price of the underlying at maturity is lower (as in calls) or higher (as in puts) at a certain threshold; equal to a pre-set value if the price of the underlying is higher (in calls) or lower (in puts) than the threshold.
RESTRICTIONS FOR CFDs
Another novelty introduced by ESMA concerns Contracts for Difference (Cfd), derivative contracts in which the buyer pays an interest rate and receives the yield of an underlying financial asset, while the seller of the contract collects the interest and commits to pay the return on the underlying asset.
In this case, the Authority provides for "a limitation concerning the marketing, distribution or sale of CFDs to retail investors - reads the ESMA note - This limitation provides for the setting of limits of the leverage effect on the opening of positions; a Automatic close out when margin is reached on a per account basis; negative balance protection on a per account basis; a ban on the use of incentives by a CFD provider as well as a warning about specific risks for the company transmitted in a standardized way”.
According to the analyzes cited by the ESMA, in the various EU jurisdictions, between 74 and 89% of the accounts of small investors are generally at a loss on investments made in CFDs, with average losses ranging from 1.600 to 29 EUR.
“INTRANSPARENT PRODUCTS, SERIOUS FEAR FOR SAVERS”
The Authority decided to intervene after having reached "the conclusion that there is a serious concern for investor protection in relation to CFDs and binary options offered to retail investors - continues the note - This is due to the complexity and lack of transparency of these products; the specific peculiarities of CFDs (excessive leverage effect) and binary options (structural expected negative return and conflicts of interest existing between suppliers and their respective customers); the disparity between expected return and risk of loss as well as marketing and distribution issues”.
QUARTERLY DURATION
But be careful: these regulatory innovations are not definitive. ESMA can only introduce quarterly measures and at the end of the period it will evaluate whether to extend the interventions for another three months.
