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ESMA weighs restrictions on certain speculative products

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ESMA weighs restrictions on certain speculative products

The European Securities and Markets Authority said it is considering measures to limit the offering of contracts for difference, binary options and other speculative products to retail clients, saying it remains concerned that existing national measures in the EU are not enough to control or reduce the risks to investor protection.

In particular, ESMA said it is considering prohibiting the marketing, distribution or sale of binary options to retail clients. The regulator is also weighing certain restrictions on the provision of contracts for difference, including spot forex, to retail investors. Restrictions on contracts for difference that are under review include a margin close-out rule, a restriction on benefits incentivizing trading, and a standardized risk warning.

ESMA said it will conduct a brief public consultation on the issue in January 2018, noting that any potential measure it may adopt can have an initial duration of up to three months and is renewable.

The U.K. Financial Conduct Authority said it supports ESMA in considering the measures. The statements of both regulators prompted reactions from a number of businesses providing trading venues for the affected products.

Online financial trading business CMC Markets Plc said the proposed changes may have an impact on the group, noting that it earned revenues of £2.1 million from binary products in the U.K. and Europe in its fiscal first half of 2018. "Proposed margin changes are likely to have an impact on how clients trade, although at this stage it is not possible to quantify the impact," the company said.

Plus500 Ltd., an Israel-based trading platform provider listed on the London Stock Exchange's AIM sub-market, said it will wait until after ESMA's consultation to understand where it will need to implement necessary adjustments to its business model. The company said it has never offered binary options and had removed bonus schemes for most of its operations as of January 2017.

IG Group Holdings Plc, meanwhile, warned that ESMA's proposed leverage restrictions on contracts for difference are "disproportionate" and could push retail clients to trade such contracts with unregulated firms based outside the EU, potentially leading to poor client outcomes.

It added that any financial impact from the proposals is unlikely to be significant in the current financial year, noting that revenue from binaries traded by clients in the U.K. and the EU represented less than 5% of its revenue in the first half.

Shares in the three companies fell sharply in Dec. 18 trading, and although they recovered some of their early losses, CMC closed down 12.5% at 146.75 pence per share, Plus500 10.8% at 825 pence per share and IG 9.3% at 665 pence per share.