On 29 June 2019, a CNMV Resolution was published in the Spanish Official Gazette - Boletín Oficial del Estado (BOE) in relation to product intervention measures related to binary options and contracts for differences.
The marketing to retail investors of certain complex and risky products, such as contract of differences (CFDs) and binary options (BOs), has been historically a matter of particular concern to the Spanish Securities Market Commission - Comisión Nacional del Mercado de Valores (CNMV), as it has been for the European Securities and Markets Authority (ESMA). CFDs and BOs themselves, as well as the risks associated with them, are difficult to comprehend for most retail investors. On most occasions, these products are available through electronic platforms where investors are not provided with investment services such as investment advice or portfolio management. There are marketing campaigns where the risks and complexity appear less relevant and where undue attention is paid to the advantages of the CFDs or BOs investments. In light of that, it is necessary to increase the protection of retail investors and impose measures to limit marketing practices which may lead to unintentional losses, mainly derived from the lack of knowledge and experience of an investor with a non-professional profile.
In view of said significant investor protection concern and as part of the measures taken to enhance retail investor protection in respect of these types of complex products, on 22 May 2018 ESMA adopted certain product intervention decisions (ESMA’s Product Intervention Decisions) consisting of:
While ESMA has renewed on three occasions the temporary prohibition of the marketing, distribution or sale of BOs to retail clients in the European Union (EU), on 01 July 2019, ESMA announced that this prohibition will not be renewed due to the fact that most national competent authorities (NCA) have taken permanent national product intervention measures relating to BOs that are at least as strict as those included in the ESMA’s Product Intervention Decision (link to this announcement may be consulted here). In view of that, ESMA’s Product Intervention Decision in respect of BOs has expired on 01 July 2019.
Among these NCAs, is the CNMV, which has recently adopted a written resolution (CNMV Resolution) (link to CNMV Resolution may be consulted here) which allows for the implementation of the product intervention measures in Spain for an indefinite period and gives clarity on the practical application in Spain taking into consideration local regulations already in place.
The CNMV Resolution is completely in line with ESMA’s Product Intervention Decision on BOs.
Entities under the scope of the CNMV Resolution
The CNMV Resolution is applicable to:
- the marketing, distribution and sale of CFDs and BOs to retail clients who are resident in Spain (regardless of their country of origin and therefore including entities acting on a cross-border basis without a branch established in Spain), and
- Spanish entities which market, distribute or sell these products in other EU Member States.
In those cases where entities are subject to both the CNMV Resolution and other EU measures, in case of discrepancies among both regimes, the stricter one shall prevail.
Products under the scope of the CNMV Resolution
In respect of products affected by these restrictions, CNMV follows ESMA’s approach and considers that CFDs includes rolling spot forex products and financial spread bets, whether traded or not. Likewise, warrants and turbo certificates are not in scope, and securitised derivatives that are CFDs are not explicitly excluded.
The CNMV Resolution expressly excludes from the prohibition of marketing, distribution and sale to retail clients the following type of BOs:
- BOs for which the lower of the two predetermined fixed amounts is at least equal to the total payment made by a retail client to acquire the BO, including fees, transaction costs and other related costs;
- A BO that has the following features:
- period from the issuance to the maturity date is equal or greater than 90 calendar days
- there is an available prospectus following the Prospectus Directive, and
- the BO does not expose the provider to market risk until the maturity date and the provider does not register any profit or loss on the BO except for commissions, transactions costs or other expenses disclosed to the client in advance.
Measures under the CNMV Resolution
Measures adopted by the CNMV (applicable to cross border activities as well) are the same as those under ESMA’s Product Intervention Decisions.
Risk warning conditions on CFDs
The risk warning conditions on CFDs are the same as under ESMA’s Product Intervention Decisions but the CNMV imposes two additional Risk warning conditions on CFDs:
- if the number of characters of the communication or published information exceeds the limitation of characters allowed by a third-party provider, there is the option of using a more abbreviated risk warning which is as follows:
“[insert percentage per provider] % of retail investor accounts in CFD lose money”
- and if said abbreviated risk warning is used, the risk warning, the communication or published information shall also include a direct link to the web page of the CFD provider that includes the complete risk warning (which coincides with the one included in Section B, Annex II of the ESMA’s Product Intervention Decisions).
Types of risk warnings on CFDs
Wording of the risk warning conditions on CFDs coincide with the ones under ESMA’s Product Intervention Decisions with the following additional aspects:
- there is an alternative more abbreviated risk warning for those cases where number of characters is limited
- in any case, the abbreviated risk warnings must include the following sentence:
“You should consider whether you understand how CFD work”, and
- there is an abbreviated risk warning in standardised characters
“Between 74-89% of retail investors of CFD lose money.”
Declaration from the retail client
In accordance with the CNMV Resolution, the obligation to obtain a written statement or verbal recording from the retail client (already in place in Spain) for at least the two first openings of trade positions shall now also be applicable to entities acting on a cross border basis.
The CNMV shall consider as best practice that entities establish an adequate policy to determine additional guarantees to ensure that clients are alerted before reaching 50% threshold of the initial guarantee which obliges the closure of the position and may, in addition, provide additional guarantees, or closing the position before reaching said threshold.
Duration and entry into force
The CNMV Resolution enters into force in respect of BOs on 02 July 2019 and in respect of CFDs on 01 August 2019. In addition, it is established that the measures will continue to be in force unless the CNMV detects that there are changes in the market conditions that allow them to be repealed.