On March 27, 2018, the European Securities and Markets Authority (ESMA) announced a range of measures for financial derivatives products, including a 2:1 leverage limit for cryptocurrency-related contracts for differences (CFDs).
Other agreed-upon leverage limits for CFDs include:
- 30:1 for major currency pairs;
- 20:1 for non-major currency pairs, gold, and major indices;
- 10:1 for commodities other than gold and non-major equity indices; and
- 5:1 for individual equities and other reference values.
The CFD measures will only begin two months after they are published in the Official Journal of the EU, and the temporary intervention must be revisited for extension within three months. The new standards were decided after a public consultation period, which lasted from January 18 until February 5.
Especially for volatile financial products (like those linked to cryptocurrencies), it's understandable that the ESMA would want to maximally limit the downside risk for retail investors. Other authorities have expressed similar concern about cryptocurrency CFDs, including the United Kingdom's Financial Conduct Authority.
CFD trading as a whole seems frighteningly risky. In its announcement, the ESMA noted that according to analysis by the National Competent Authorities on CFD trading across EU jurisdictions, between 74 and 89 percent of retail accounts "typically lose money on their investments, with average losses per client ranging from 1,600 euros to 29,000 euros."
In addition to the new leverage limits, the ESMA determined that brokers must offer negative balance protection and close margin positions if an account reaches 50 percent of the minimum required margin. The regulatory institution will also impose restrictions on incentives offered to trade CFDs and mandated that brokers provide a standardized risk warning, including the "percentage of losses on a CFD provider's retail investor accounts."
While the ESMA allowed CFD providers to continue operations, it instituted a broad prohibition on the marketing, distribution, or sale of binary options (cryptocurrency, or otherwise) to retail investors.
"The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors," said ESMA chair Steven Maijoor. "The new measures on CFDs will for the first time ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide a risk warning for investors. For binary options, the prohibition we are announcing is needed to protect investors due to the products' characteristics."
In November 2017, ETHNews reported when the ESMA warned the public of the risks associated with initial coin offering (ICO) investments and reminded firms to abide by international and domestic legal requirements. More recently, in February 2018, the ESMA along with the European Banking Authority (EBA) and European Insurance and Occupational Pensions Authority (EIOPA) issued a warning about the financial dangers inherent in virtual currency ownership.