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EU regulator bans binary options, limits contracts for difference

Europe's market regulator plans to ban the marketing, distribution and sale of binary options to retail investors and limit such activities with respect to contracts for difference.

The European Securities and Markets Authority said its board of supervisors agreed on the measures March 23 following a consultation launched in January. Binary options are an all-or-nothing bet on the value of a given asset, while contracts for difference, or CFDs, allow investors to gamble on how much and in what direction an asset will move, typically in a leveraged fashion.

The limits on contracts for difference include a margin close-out rule that will require CFD providers to close a CFD or CFDs when the investor has lost half the original margin required to open the contract. ESMA said the rule does not prevent investors from topping up their account if they so desire.

The limits also include a negative balance protection on a per-account basis to provide an overall guaranteed limit on retail client losses; preventing CFD providers from offering incentives to customers to trade more; and a firm-specific standardized risk warning, including the percentage of losses on a CFD provider's retail investor accounts.

ESMA will also impose leverage caps on retail clients' ability to open positions, with the caps varying based on the volatility of the underlying asset. A cap of 30:1 will be imposed for major currency pairs; 20:1 for nonmajor currency pairs, gold and major indexes; 10:1 for commodities other than gold and nonmajor equity indexes; 5:1 for individual equities and other reference values; and 2:1 for cryptocurrencies.

The regulator said it agreed to the measures after it concluded that a significant investor protection concern in relation to binary options and CFDs exists, due to their complexity and lack of transparency, the disparity between expected returns and risk of losses and issues related to marketing and distribution.

"[The measures] will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors," ESMA Chairman Steven Maijoor said.

ESMA noted that it can only introduce temporary intervention measures on a three-monthly basis, adding that it will consider extending the measures for a further three months before the initial period ends.

FCA support

The U.K. Financial Conduct Authority said it supports ESMA's measures, and added that it expects to consult on whether to apply them on a permanent basis.

Shares in three U.K.-listed providers of CFDs and binary options had varied reactions in March 27 trading. IG Group Holdings Plc said it was disappointed with ESMA's decision to impose "disproportionate" leverage restrictions, saying the limits will "unduly restrict consumer choice, and risk pushing retail clients to providers based outside the EU or to use other products which allow the leverage clients seek," potentially leading to poor client outcomes.

The company said it believes that there will not be any financial impact from the implementation of the measures in the current financial year, which runs through May, although it expects its revenue for financial year 2019 to be lower than the level expected in financial year 2018. Its shares were down more than 5% as of just before 1 p.m. London time.

CMC Markets Plc was down 2.5% after it said margin changes were "likely to have an impact on how clients trade, although at this stage it is not possible to quantify the impact." It added that its target audience are "high-value, experienced clients that could be categorized as elective professionals," and it also said binary options represented just £2.1 million of revenue in the first half of 2018, meaning any reduction in revenue from the retail investor ban would be "immaterial in a group context."

Plus500 Ltd., which is based in Israel, was up 2.7% as it noted that it had never offered binary options and already provided clients with an element of many of the protections to be implemented by ESMA. It said its "very strong start to 2018 trading" suggests a limited impact on performance for the year, and that it would assess the effect for future years but drew confidence from a model that includes being licensed in seven jurisdictions, including five outside Europe.