Concluding that Contracts for Differences (CFDs) and binary options do indeed represent a real and significant investor protection concern , the European Securities and Markets Authority (ESMA) in cooperation with National Competent Authorities (NCAs), agreed to measures prohibiting the marketing, distribution and sale of both products to individual investors.
It is the inherent complexity of CFDs and binary options, requiring detailed knowledge and insights into the risks and rewards on behalf of the individual investor, and the lack of transparency, that make both particularly unsuitable for individual investors. Analysis by the NCAs of CFDs trading across different EU jurisdictions shows that 74%-89% of individual investors` accounts typically lose money on their investments, with losses ranging from €1,600 to €29,000. Similar research into binary options finds consistent losses on retail clients` accounts.
Commenting on the agreed-upon measures, ESMA Chair Steven Maijoor stated that: “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.”
The decision follows ESMAs new product intervention powers, granted by MiFID II, to ban or restrict the distribution of toxic investment products to individual investors. Commenting on these efforts, BETTER FINANCE welcomed the initiative in February, stating that the ESAs were now "empowered with broader product intervention powers, no longer solely on the basis of financial risk and stability considerations but including the power to bank or put on hold the selling of financial products that are toxic or not suited for retail clients”.
Despite BETTER FINANCE`s positive response to the agreed-upon measures on CFDs and binary options, questions still linger as to why these two financial products in particular were the first ones chosen to undergo prohibitive measures. In fact, they represent a relatively small portion of EU households` financial savings, and there are mass-retail investment products that result in far more harm to EU savers.
To read more, please see recent article published by wansqaure.