In accordance with its press release from late March, ESMA, the European Securities and Markets Authority,is extending its restriction on the sale, marketing, and distribution of Contracts for Differences, or CFDs, to retail clients. The ban comes back into effect from 1 May 2019 until the end of July 2019. ESMA has determined that sufficient risk to investors exists to warrant an extension of the ban that has been in place since the beginning of August 2018.

To those who are not familiar with the term, CFDs are financial contracts set up between two parties where the seller will pay the buyer the difference between the current value of an asset and the value when the contract reaches maturity. If the contract value difference of the asset at maturity is positive, then the CFD buyer is rewarded with the positive amount. If the contract value is negative, then the buyer pays the difference to the seller. In effect, CFDs are like call options, but the buyer can be subject to a significant loss if the asset drops in value. With an option, the buyer will simply lose the price paid for the option. With a CFD, the buyer’s loss is unlimited to the downside.

ESMA’s restriction is dependent on the finalization of a set of rules to govern CFD trading. One of the major requirements is the establishment of leverage limits set by the seller of the contract. These range from 30:1 to 2:1 depending on the volatility of the underlying asset. For example, 30:1 applies to currency pairs, while 2:1 would apply to cryptocurrencies.

A margin close-out rule will also be put in place. This would limit the percentage of margin to 50% of the minimum required margin, at which point the CFD seller would be obliged to close out the position. In addition, there would be negative balance protection that would loss limit of any individual trade. This would protect CFD buyers should markets drop dramatically, exposing the retail investor to open-ended risk. This brings the CFD contract more in line with the limited loss liability of a call option contract. CFD sellers would also have their rights restricted with regard to the level of promotion and advertising for CFD contracts, and an additional risk warning would be required clearly indicating the level of risk to which CFD buyers would be exposed.

Issues have also been addressed regarding a number of technical issues regarding risk warnings submitted by the CFD sellers. These involve the number of characters used in the warnings that were imposed by third-party marketing providers. ESMA has approved the introduction of reduced character risk warnings, but this reduced character warning would only be acceptable if the warnings themselves contained the web page of the CFD provider, where the full warning would have to be displayed.

ESMA’s renewal decision does not come as a surprise to the European Forex industry, as both brokers and traders have been expecting ESMA to stay on course. As in the past, brokers who want to play by the rules and attract prestige clientele will have to adapt, while traders who are hunting for big risks will have to take their trading elsewhere.


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Editors’ Picks

EUR/USD bounces off lows, back to 1.1860

EUR/USD bounces off lows, back to 1.1860

EUR/USD now manages to regain some balance, retesting the 1.1860-1.1870 band after bottoming out near 1.1830 following the US NFP data on Wednesday. The pair, in the meantime, remains on the defensive amid fresh upside traction surrounding the US Dollar.

GBP/USD rebounds to 1.3660, USD loses momentum

GBP/USD rebounds to 1.3660, USD loses momentum

GBP/USD trades with decent gains in the 1.3660 region, regaining composure following the post-NFP knee-jerk toward the 1.3600 zone on Wednesday. Cable, in the meantime, should now shift its attention to key UK data due on Thursday, including preliminary GDP gauges.

USD/JPY declines as Yen strengthens after election win, overshadowing US jobs data

USD/JPY declines as Yen strengthens after election win, overshadowing US jobs data

The US Dollar rose briefly after stronger-than-expected job creation but gave back gains against a firm Japanese Yen. The Unemployment Rate falls to 4.3% and wages accelerate, reinforcing expectations of a prolonged Fed pause. Sanae Takaichi’s election victory fuels demand for the Japanese Yen, pushing USD/JPY down for the day.


Editors’ Picks

EUR/USD bounces off lows, back to 1.1860

EUR/USD bounces off lows, back to 1.1860

EUR/USD now manages to regain some balance, retesting the 1.1860-1.1870 band after bottoming out near 1.1830 following the US NFP data on Wednesday. The pair, in the meantime, remains on the defensive amid fresh upside traction surrounding the US Dollar.

GBP/USD rebounds to 1.3660, USD loses momentum

GBP/USD rebounds to 1.3660, USD loses momentum

GBP/USD trades with decent gains in the 1.3660 region, regaining composure following the post-NFP knee-jerk toward the 1.3600 zone on Wednesday. Cable, in the meantime, should now shift its attention to key UK data due on Thursday, including preliminary GDP gauges.

Gold stays bid, still below $5,100

Gold stays bid, still below $5,100

Gold keeps the bid tone well in place on Wednesday, retargeting the $5,100 zone per troy ounce on the back of humble gains in the US Dollar and firm US Treasury yields across the curve. Moving forward, the yellow metal’s next test will come from the release of US CPI figures on Friday.

Ripple Price Forecast: XRP sell-side pressure intensifies despite surge in addresses transacting on-chain 

Ripple Price Forecast: XRP sell-side pressure intensifies despite surge in addresses transacting on-chain 

Ripple (XRP) is edging lower around $1.36 at the time of writing on Wednesday, weighed down by low retail interest and macroeconomic uncertainty, which is accelerating risk-off sentiment.

US jobs data surprises to the upside, boosts stocks but pushes back Fed rate cut expectations

US jobs data surprises to the upside, boosts stocks but pushes back Fed rate cut expectations

This was an unusual payrolls report for two reasons. Firstly, because it was released on  Wednesday, and secondly, because it included the 2025 revisions alongside the January NFP figure.

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