ESMA updates on FX, CFDs and Binaries

European Securities and Markets Authority has released its updated vision on the retail financial products – Spot FX contracts, binary options and Contracts-for-Differences. While there has been no official decision taken, the current update serves only informational purposes. Let’s take a look at main concepts and analyze how they will impact the retail FX sector from both the trader’s and broker’s perspectives.

Binaries

Prohibit the marketing, distribution or sale to retail clients of binary options – this is the first point of the update and this it gives us a better idea that 2017 may certainly be the last year of the binary options in the EU. Even though we previously reported that the FCA will govern binary options in the UK as of the 3rd of January, UK might also adopt the similar vision as ESMA and prohibit binary trading.

In general, this is a good decision as the binary options industry has been given a bad name to all sorts of online financial trading areas. However, this might not be the smartest move, as the prohibition can hardly lead to proper results. Binary companies are very likely to relocate to the areas outside of EU but will continue operating within the EU. This can only be stopped by introducing a certain block on the payment system level, yet this is very unlikely.

FX and CFDs

Restrict the marketing, distribution or sale to retail clients of CFDs,  including rolling spot forex – similar to the point above, ESMA plans to add an additional layer of restriction for FX and CFD trading products. While some local regulators have already restricted various trading incentives, we clearly can expect those to be EU-wide practices. Apart from that, it might be possible to see some additional restrictions in terms of not only what the brokers market but also how they do it.

Obviously, this is a very bad announcement for the brokers as it only gets harder to acquire the clients and with the new restrictions, it will become even more challenging. At the same time, unregulated FX brokers would still be able to offer bonuses and other incentives.

This is also quite negative for the traders. It does seem like such restrictions only apply to the FX brokers. Other financial institutions (like banks), can easily market their products without too many restrictions.

According to ESMA, the restrictions on CFDs that are currently under consideration are the following:

• leverage limits on the opening of a position between 30:1 and 5:1, whose limit will vary according to the volatility of the underlying asset
• a margin close-out rule
• negative balance protection to provide a guaranteed limit on client losses;
• a restriction on benefits incentivising trading; and
• a standardised risk warning.

While most of the points above are expected, the changes in the leverage might be a deadly practice for the marginal trading, as it would reduce the brokers’ volumes quite a lot. However, this should make the whole process of online trading much safer for the clients.

We should hear back from ESMA again in January 2018. Considering the current updates, it does seem that the whole online trading sector will become safer for the clients and its reputation will only improve. However, the main question is whether the regulators will be able to discourage the traders from opting in for the unregulated brokers or implement some sort of the blocking systems as it is obvious that such brokers will provide more competitive offers.

For more information, read the announcement on the ESMA’s website.