Robust response to risky financial derivatives in Europe
To protect retail investors, the European Securities and Markets Authority (ESMA) is taking action over complex financial derivatives, seeking that binary options are not accessible to retail investors at all and trade in contracts for differences (CFDs) becomes less risky and more transparent.
The recast Markets in Financial Instruments Directive (MiFID2) which came into effect from the beginning of 2018 enabled ESMA to apply strict intervention measures (prohibitions and restrictions) to products and services posing particular threat to retail investors.
Considering these threats, ESMA adopted a decision, which is shortly to become effective across the European Union (EU), to prohibit marketing, offering and selling binary options to retail investors and to begin applying restrictions to contracts for differences. Contracts for differences are subject to a leverage limit, each individual account is subject to the margin close-out rule, as well as protection against negative balances. A prohibition to use incentives by a CFDs provider and the obligation to publish a risk warning delivered in a standardised way are also provided for. These measures have been undertaken as the above-named products are complex, risky, not transparent enough, and quite many problems ensue over their offering, trade and distribution.
Research carried out by of EU institutions shows that most of retail investors trading in contracts for differences (74–89%) lose their money, while the average amount of loss incurred by one client varies between €1,600 and €29,000.
It is expected that the tightened measures of ESMA will be published in the Official Journal of the European Union. After the transitional period following this publication, they will come into force across the EU and Lithuania alike. Prohibitions for binary options are subject to a transitional period of one month, for restrictions on trade in contracts for differences – of two months.
The Bank of Lithuania also reminds residents of the three major recommendations prior to investing funds: not to invest in products the essence of which they do not understand, to check whether the institution offering investment services holds the required licence, and to avoid proposals that promise ‘quick money’ and ‘no risk’.
In addition, the Bank of Lithuania announces the list of entities that are not authorised to provide investment services in our country but offer them and thus provide possibilities for trading in financial instruments on the websites administered by them. The products offered by them also include the above-named financial derivatives.