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Introduction to the new ESMA regulations

In the summer of 2018, the European Securities and Markets Authority (ESMA) adopted new measures regarding the provision of contracts for differences (CFDs) and binary options. These measures were introduced with a view to protect retail investors.

Binary options

From July 2nd 2018, ESMA prohibited the marketing, distribution or sale of binary options to retail investors.

Contracts for Differences (CFDs)

From August 1st 2018, ESMA introduced restrictions on the marketing, distribution or sale of CFDs to retail investors. These restrictions consist of:

  • Leverage limits on opening positions. These restrictions on leverage, which vary between 1:2 and 1:30, now depend on the underlying asset class, with more volatile asset classes attracting lower limits.
  • A margin close out rule on a per account basis. This standardized the percentage of margin at which brokers are required to close out one or more of their retail clients' open CFDs, at a minimum of 50%.
  • A negative balance protection on a per account basis, to ensure that retail clients cannot loose more than they have invested.
  • A ban on the use of incentives, such as bonuses, by CFD brokers.
  • Standardized risk warnings.
ESMA limits on leverage
  • 1:30 for major currency pairs;
  • 1:20 for non-major currency pairs, gold and major indices;
  • 1:10 for commodities other than gold and non-major equity indices;
  • 1:5 for individual equities and other reference values;
  • 1:2 for crypto-currencies.
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