5COMPLY GABRIEL STYLLAS CEO and Founder of 5COMPLY
Introduction It’s been 2 years now since European Securities and Markets Authority’s (“ESMA”) first introduced the temporary ESMA product intervention measures on Contracts for Differences (“CFDs”) with restriction on the marketing, distribution or sale of CFDs to retail investors. This restriction 2 years ago introduced: leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and a firm specific risk warning delivered in a standardised way. Although ESMA’S intervention was originally drafted as being “temporary”, National Competent Authorities (NCAs) about a year ago published their National Product Intervention Measures in relation to the marketing, distribution and sale of CFDs by issuing relevant local legislation. The measures of NCAs were largely aligned with the ESMA’s temporary product intervention measures. The intention Obviously ESMA’s aim was to protect retail investors, as consumers, from what ESMA perceived to be products that are perceived to have adverse consequences for certain retail investors. ESMA’s goal was certainly to protect the EU retail clients and it seems most of the restrictions were towards the right direction e.g. negative balance protection and risk warnings. The measures on CFDs ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide understandable risk warnings for investors. The Outcome - two years later Since the introduction of ESMA’s temporary intervention measures the big majority of EU retail clients have set up accounts with CFD brokers that are established outside the EU. It seems that traders were looking for offshore brokers and they were willing to accept the additional risks involved.
Gabriel Styllas CEO and Founder of 5COMPLY
Although It is only on the traders’ own initiative that an account can be set up with a CFD broker that is established outside of the EU this was not always the case. Two years later the results are disappointing as the big majority of EU retail clients, ESMA wanted to protect have already moved the relationship, to permitted jurisdictions that could offer them higher leverage, even though most of the times there are no investor compensation funds available and no negative balance protection. Bottom line the retail clients who want to get higher leverage most of the times are ready to get higher risks as well and unfortunately sometimes they are ready to move to brokers that they are not regulated at all. Who are the winners Some offshore regulators like Seychelles FSA and Mauritius FSC managed to attract many new brokers (mainly EU brokers that would like to offer their
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