(1)

By Decision (EU) 2018/796 (4), the European Securities and Markets Authority (ESMA) restricted the marketing, distribution or sale of contracts for differences (CFDs) to retail clients with effect from 1 August 2018 for a period of three months.

(2)

In accordance with Article 40(6) of Regulation (EU) No 600/2014, ESMA must review a temporary product intervention measure at appropriate intervals and at least every three months.

(3)

By Decision (EU) 2018/1636 (5), ESMA renewed and amended the temporary restriction on the marketing, distribution or sale of CFDs to retail clients with effect from 1 November 2018 for a period of three months. By Decision (EU) 2019/155 (6), ESMA renewed again the temporary restriction on the marketing, distribution or sale of CFDs to retail clients on the same terms as Decision (EU) 2018/1636, with effect from 1 February 2019 for a period of three months.

(4)

ESMA's further review of the restriction on CFDs has been informed by, inter alia, a survey among national competent authorities (7) (NCAs) on the practical application and impact of the product intervention measure as well as additional information provided by NCAs and stakeholders. This information presents similar trends as the information which led to the previous renewal, Decision (EU) 2019/155.

(5)

NCAs detected only limited examples of non-compliance with the ESMA product intervention measure, which mainly related to the risk warnings, notably CFD providers displaying internet banners or other electronic advertisements which did not contain the required risk warning. While internet banners or other electronic advertisements typically did not refer explicitly to CFDs but rather to online investment activities, NCAs and ESMA will continue monitoring their compliance with the risk warning requirements and that they are not used as a means of circumvention.

(6)

NCAs reported an overall decrease in the number of CFD retail client accounts, trading volume and total retail client equity over the three months from November 2017 to January 2018 (first period) in comparison with November 2018 to January 2019 (second period). The share of profitable accounts remained broadly stable when comparing these periods (8). The average costs incurred by retail clients while trading CFDs, which appear to be less dependent on market conditions than the overall client outcomes, were significantly lower in the second period in comparison to the first period (9). Average costs in respect of active retail accounts containing CFDs on cryptocurrencies fell disproportionately in comparison to others, though such accounts continued to incur higher costs than accounts with no cryptocurrency exposure. Finally, NCAs reported a sustained decrease in the number of automatic close-outs, the number of times accounts went into negative equity and the size of negative equity balances for retail client accounts (10).

(7)

NCAs also reported an increase in the number of clients treated as professional clients on request in the second period in comparison with the first period. ESMA is aware that some CFD providers are advertising to retail clients the possibility of becoming professional clients on request. However, a retail client may request to be treated as a professional client when, in particular, the client submits a request in writing in accordance with all the requirements set out in the applicable legislation. Providers should ensure that they comply at all times with those requirements (11). ESMA is also aware that some third-country firms are actively approaching Union clients or that some CFD providers in the Union are marketing the possibility for retail clients to move their accounts to an intra-group third-country entity. However, without authorisation or registration in the Union, third-country firms are only allowed to offer services to clients established or situated in the Union at the client's own exclusive initiative. Finally, ESMA is aware that firms are starting to provide other speculative investment products. ESMA will continue to monitor the offer of these other products to determine whether any other Union measures are appropriate.

(8)

Since the adoption of Decision (EU) 2018/796, ESMA did not obtain evidence contradicting its overall finding of a significant investor protection concern identified in Decision (EU) 2018/796, Decision (EU) 2018/1636 or Decision (EU) 2019/155 (Decisions). ESMA has therefore concluded that the significant investor protection concern identified in the Decisions would persist if the temporary restriction on the marketing, distribution or sale of CFDs to retail clients is not renewed.

(9)

Moreover, the applicable existing regulatory requirements under Union law have not changed and continue not to address the threat identified by ESMA. Furthermore, NCAs have not taken action to address the threat or the actions taken do not adequately address the threat. This continues to be a pan-European concern. Therefore, ESMA considers that, without additional NCAs taking national product intervention measures, a further renewal of ESMA's measure is needed for the significant investor protection concern identified in the Decisions to be adequately addressed.

(10)

The renewal of the restriction does not have a detrimental effect on the efficiency of financial markets or on investors that is disproportionate to the benefits of the action and does not create a risk of regulatory arbitrage for the same reasons set out in the Decisions.

(11)

If the temporary restriction is not renewed, ESMA continues to consider it likely that CFDs will again be offered to retail clients without adequate measures to sufficiently protect them against the risks related to those products that gave rise to the consumer detriment identified in the Decisions.

(12)

In view of these reasons, taken together with the reasons set out in the Decisions, ESMA has decided to renew the restriction on the same terms as those set out in Decision (EU) 2018/1636 and Decision (EU) 2019/155 for a further three-month period to address the significant investor protection concern.

(13)

As the proposed measures may, to a limited extent, relate to agricultural commodities derivatives, ESMA has consulted the public bodies competent for the oversight, administration and regulation of physical agricultural markets under Council Regulation (EC) No 1234/2007 (12). None of those bodies has raised any objections to the proposed renewal of the measures.

(14)

ESMA has notified NCAs of the proposed renewal Decision,

(a)

‘contract for differences’ or ‘CFD’ means a derivative other than an option, future, swap or forward rate agreement, the purpose of which is to give the holder a long or short exposure to fluctuations in the price, level or value of an underlying, irrespective of whether it is traded on a trading venue, and that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event;

(b)

‘excluded non-monetary benefit’ means any non-monetary benefit other than, insofar as they relate to CFDs, information and research tools;

(c)

‘initial margin’ means any payment for the purpose of entering into a CFD, excluding commission, transaction fees and any other related costs;

(d)

‘initial margin protection’ means the initial margin determined by Annex I;

(e)

‘margin close-out protection’ means the closure of one or more of a retail client's open CFDs on terms most favourable to the client in accordance with Articles 24 and 27 of Directive 2014/65/EU when the sum of funds in the CFD trading account and the unrealised net profits of all open CFDs connected to that account falls to less than half of the total initial margin protection for all those open CFDs;

(f)

‘negative balance protection’ means the limit of a retail client's aggregate liability for all CFDs connected to a CFD trading account with a CFD provider to the funds in that CFD trading account.

(a)

the CFD provider requires the retail client to pay the initial margin protection;

(b)

the CFD provider provides the retail client with the margin close-out protection;

(c)

the CFD provider provides the retail client with the negative balance protection;

(d)

the CFD provider does not directly or indirectly provide the retail client with a payment, monetary or excluded non-monetary benefit in relation to the marketing, distribution or sale of a CFD, other than the realised profits on any CFD provided; and

(e)

the CFD provider does not send directly or indirectly a communication to or publish information accessible by a retail client relating to the marketing, distribution or sale of a CFD unless it includes the appropriate risk warning specified by and complying with the conditions in Annex II.