The European Securities and Markets Authority (ESMA) is urging the competent authorities of EU members to tighten control over entities offering financial speculative products like spot forex and binary options, indicated a question-and-answer (Q&A) document on the application of the Markets in Financial Instruments Directive (MiFID) published by the authority on Tuesday.
The document concerns the marketing and sale of financial contracts for difference (CFDs) and other speculative products to retail clients, such as binary options and rolling spot forex.
According to the authority, firms use attractive benefits, such as bonuses they can reinvest to lure retail traders into trading in CFDs or other speculative products with high risk. National authorities should consider that fact and make sure these practices comply with the MiFID and are in the best interest of investors.
“Given the complex and speculative nature of the products, it is especially important for [National Competent Authorities] NCAs to consider the use of trading benefits by firms offering CFDs and other speculative products to retail clients, in order to ensure that the MiFID obligation to act honestly, fairly and professionally […],” the ESMA document read.
Leverage, spread, fund withdrawal are also on the agenda
ESMA’s Q&A document included several other new sections regarding financial trading instruments. The additions reflect on practices observed in the markets that were previously not addressed.
For one thing, the European authority has included a section dedicated to clients’ right to have access at any time to their funds deposited with a firm offering CFDs and other speculative products. Many brokers delay or refuse withdrawals and NCAs, as market supervisors, consider the processes that firms have in place when responding to a request from a retail client trading in CFDs or other speculative products to withdraw funds from their trading account. Generally, a firm is able to process a client’s request to withdraw funds on the same day that the request was made, or the next working day if the client’s request is received outside of normal trading hours.
Leverage is another key factor to which NCAs should pay attention and make sure firms that offer leveraged high-risk products act in clients’ interest. According to the ESMA, the maximum leverage rates brokers offer are usually very high, especially for forex instruments. The authority recommends that brokers should not offer clients the maximum leverage as default, but should instead provide them the option to lower the leverage in order to limit their exposure. In its viewpoint, traders should not dedicate their entire deposits to meeting margin requirements, in order to protect the client against market volatility.
“NCAs should make sure that firms do not offer higher leverage to clients who do have less knowledge and experience of trading CFDs and other leveraged speculative products or to clients who are worse performing traders,” the ESMA said.
Spreads, on the other hand, are another key trading condition. Many firms in this sector disclose minimum spreads, but they often end up being offered for a limited time during a day and/or for a limited number of transactions. Brokers should give clients sufficient information about the expected spreads throughout their trading experience, including busy hours and volatile periods.
Pricing policies should be clear and relevant
According to the Q&A document, NCAs should pay particular attention to how firms derive their pricing for CFDs and other speculative products, as well. Brokers should be able at all tome to demonstrate how they derive prices for CFDs or other speculative products. They should review their arrangements, including price sources, on at least an annual basis and ensure the prices used are the most appropriate for the type of orders being received from its retail clients.
Last, but not least, ESMA urges NCAs to ensure that firms can clearly demonstrate who within the firm has responsibility and accountability for ensuring that its execution arrangements and policies meet MiFID requirements.
Europe is going wild with the topic
ESMA’s recommendations and requirements come on the background of an increased regulatory activity concerning risky instruments in Western Europe. Most reputable authority bodies have expressed intentions to restrict high-risk trading in instruments such as binary options. France and the Netherlands are in the process of developing bills that would prohibit the advertisement of risky instruments and Germany is also considering the possibility, but has not made any steps as of now.
Meanwhile, Belgium banned from 18 August the distribution via online channels of over-the-counter (OTC) binary options, spot forex, and CFDs with leverage.
The ESMA is an independent EU authority that directly supervises and safeguards the EU financial markets. It has established a single rulebook for EU financial markets and promotes the convergence of the regulatory bodies of EU countries. In addition, it also assesses risks to investors, markets and financial stability. You can view the full ESMA report by clicking here.