EU markets watchdog clamps down on CFDs, 'binary' options

European Stock Markets

The European Union’s securities watchdog said on Tuesday it will ban ‘binary’ options sales to retail clients and restrict the sales of Contract for Differences (CFDs) to protect investors from significant losses.

The European Securities and Markets Authority (ESMA)said it was prohibiting the marketing, distribution and sale of binary options to retail investors, while its restrictions on CFDs would affect the marketing, sale and distribution of them. 

Binary options and CFDs are financial products that give an investor exposure to price movements in securities without actually owning the underlying assets such as a currency, commodity or stock. 

“ESMA, along with National Competent Authorities (NCAs), concluded that there exists a significant investor protection concern in relation to CFDs and binary options offered to retail investors,” it said in a statement. “This is due to their complexity and lack of transparency.” 

ESMA has said it has been concerned about how these inherently high-risk speculative products are offered to retail investors, potentially leading to significant losses and in December flagged plans to ban their sale, sending shares of spreadbetting firms tumbling. 

Analysis on trading in the EU showed 74-89 percent of retail accounts typically lose money on their investments, with average losses per client ranging from 1,600-29,000 euros ((£1,124.54-£25,372.71), ESMA said. 

Shares in IG Group (IGG.L) were down 6.2 percent, Plus 500 (PLUSP.L) up 0.9 percent, while CMC Markets stock was down 1.13 percent by 0816 GMT. 

IG, which was founded in 1974 as the world’s first spread-betting firm, said it was “disappointed” that ESMA had imposed leverage restrictions, adding that this would risk pushing retail clients to providers based outside of the EU, resulting in poor client outcomes. 

It said, however, that while the measures announced by ESMA only relate to retail clients, IG’s client base was dominated by sophisticated traders. 

IG expects its revenue in the 2019 financial year would be lower than that expected in 2018, primarily reflecting the impact of the regulatory changes in the UK and EU. 

Despite facing uncertainty from proposed regulation on these products, IG and its rivals have reported revenue growth recently as they signed up record numbers of customers, partly due to the boom in digital currencies such as bitcoin. 

Investec, which rates IG as a ‘Buy’, said the changes would imply a cut to 2019 revenue estimates of about 2 percent, with a 5 percent reduction in pretax profit.