ESMA extends and amends product intervention measures

As widely anticipated, ESMA has determined to renew its product intervention measures regarding binary options and CFDs for a further three-month period. In recent days there have been other developments in this area, including IOSCO’s report on retail OTC leveraged products and ESMA updating its related Questions and Answers.

Renewal Decision in relation to Binary Options


The Binary Option product intervention measures are extended from 02 October 2018 for a period of three months.

New exclusions

The extension measures introduce two new exclusions which were envisaged in previous communications from ESMA. The new exemptions are set out below together with our preliminary comments:

(a) a binary option for which the lower of the two predetermined fixed amounts is at least equal to the total payment made by a retail client for the binary option, including any commission, transaction fees and other related costs, and

S&S commentary

As mentioned in our previous Newsflash, this exemption is helpful in that it clearly brings capital-protected products out of scope. However, this is arguably only clarificatory in nature, and does not limit the scope of the original measures which were not expressed to apply to capital-protected products.

The related recitals to the extension measures refer to products which feature a risk of “substantial losses”. The new exemption and this recital arguably make the position less clear with respect to products which feature a very low, but not zero, downside exposure. We recommend that issuers and distributors carefully consider the classification of these sorts of products against this new exemption.

(b) a binary option that meets the following conditions:

(i) the term from issuance to maturity is at least 90 calendar days
(ii) a prospectus drawn up and approved in accordance with Directive 2003/71/EC is available to the public, and
(iii) the binary option does not expose the provider to market risk throughout the term of the binary option and the provider or any of its group entities do not make a profit or loss from the binary option, other than previously disclosed commission, transaction fees or other related charges.

S&S commentary

In our previous Newsflash, we commented that limb (c) of this exemption may prove difficult for some issuers to comfortably satisfy. This limb seems to require products to be fully hedged, but there is no particular guidance on how products must be hedged. Issuers seeking to rely on this exclusion will need to consider their hedging arrangements and carefully review whether there is any residual exposure to market risk, which may preclude reliance on the exemption.

Renewal Decision in relation to CFDs

In light of the significant investor protection concern that continues to exist in relation to the offer of CFDs to retail clients, ESMA has agreed to renew the restriction on the marketing, distribution or sale of CFDs to retail clients, from 01 November 2018 for a further three-month period.

The renewal was agreed by ESMA’s Board of Supervisors on 26 September 2018.

In addition to renewing the requirements set out in the original measures relating to leverage limits, close-out rules, negative balance protection and the offer of trading incentives, ESMA has agreed to introduce the following reduced character risk warning:

[insert percentage per provider] % of retail CFD accounts lose money.

This follows technical difficulties encountered by CFD providers in using the risk warnings due to the character limitations imposed by third party marketing providers.

For further detail on the above measures, please see our previous email Newsflashes or contact any member of your Simmons & Simmons team.

IOSCO Report on Retail OTC Leveraged Products

Also of note in this area, IOSCO has recently published a report on retail OTC leveraged products which reviews areas which can be reviewed to enhance protection of retail investors in this area.

In preparing the report, IOSCO has developed three toolkits which concern:

  • Policy measures with guidance for the regulation of the offer and sale by intermediaries
  • Investor education materials, and
  • Enforcement approaches and practices to address and mitigate the risks posed by unlicensed firms.

These toolkits do not mandate regulatory action as IOSCO acknowledges that not every measure would be appropriate in all jurisdictions. However, given the comprehensive report, we expect market participants and regulators to have regard to these toolkits in formulating and assessing related compliance and governance structures.

Updated Q & A

The Q & A has been updated to include the following guidance on rolling spot forex products for the purposes of the CFD Measures:

“Paragraph 8 of the CFD Decision clarifies that rolling spot forex products are in scope. The CFD Decision applies to rolling spot forex that do not qualify as an option, future, swap or forward rate agreement. A forex derivative which uses the spot price as reference value and automatically rolls over at the end of the contract period and allows a party to terminate the contract other than by reason of default or another termination event is a CFD for the purposes of Article 1(a) of the CFD Decision.”

There has been significant discussion on the extent to which the measures may apply to forex products and this guidance is helpful in this regard. However, we expect questions to remain in relation to classification of certain non-deliverable foreign exchange contracts which the industry will need to continue to carefully consider.

Next steps

Please contact Penny Miller, Michael Dodson, Oliver West or any other member of the Simmons & Simmons team for further information.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.