ESMA (European Securities and Markets Authority) recently issued updated and clarified restrictions on CFDs ("Contracts For Difference").
In a press release on its official website, the European Financial Authority explains that it “renews its restriction on the marketing,
distribution or sale of difference contracts (CFDs) to retail customers, in force since 1 August, as from 1 November 2018, for a further period of three months. "- i.e. until 1 February 2019.
Approved by ESMA's Supervisory Board on 26 September 2018, the restriction concerns gold, stock market indices, currencies and cryptocurrencies, on which a leverage limit of 2:1 for CFDs is applied on the opening of a position for a particular client.
Also included, a "negative balance protection" obligation must guarantee a loss limit for individual customers.
As a reminder, a CFD is a contract between two investors who exchange the difference value between the opening price and the closing price of a given asset. Previously reserved for investment professionals, CFDs have been made accessible to all by online brokers who allowed everyone to use them without much trading knowledge.
There will also be a new mandatory element to mention: brokers will be required to indicate the percentage of individual accounts that are losing money.
ESMA has yet to translate this renewal of CFD restrictions into the official languages of the EU before publishing an official notice on its website. Only then can the measure be published in the Official Journal of the EU, and thus effective from 1 November 2018 for 3 months until 1 February 2019.
In March, ESMA implemented strong requirements for CFDs, stating that:
“Due to the specific characteristics of cryptocurrencies as an asset class the market for financial instruments providing exposure to cryptocurrencies, such as CFDs, will be closely monitored, and ESMA will assess whether stricter measures are required.”
CFDs are part of derivative financial instruments that allow you to trade up or down by speculating on the price evolution of an underlying asset.
CFDs are risky financial instruments. Unlike exchanges where you own real cryptocurrencies (although you do not own the private keys), CFDs are contracts between the broker and the trader. No real cryptos underlying this contract are involved.
Author: Matias Gross.
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