Luxembourg Regulator to Adopt ESMA’s Binaries and CFDs Curbs

Wednesday, 26/06/2019 | 19:19 GMT by Aziz Abdel-Qader

CSSF said that effective July 1, it will bring in a temporary ban on the binary trades alongside controls on CFDs.

Luxembourg Regulator to Adopt ESMA’s Binaries and CFDs Curbs — Luxembourg's Prime Minister Xavier Bettel (Reuters)

The regulator of Luxembourg’s financial markets, the Commission de Surveillance du Secteur Financier (CSSF), today confirmed it would adopt recently introduced European restrictions around trading binary options and contracts for difference.

In two separate statements, the CSSF said that effective July 1, 2019, it would bring in a temporary ban on these binary 'win or lose' trades alongside controls on margin trading. The watchdog also imposed restrictions on the sale of contracts for difference (CFDs), which will go into effect from August, aiming to protect retail investors from heavy losses.

In August 2018, Europe’s regulator ESMA introduced its restrictions measures including lowering the maximum leverage that brokers can offer, which constituted ESMA’s first use of emergency product intervention powers afforded to the watchdog under MiFID II rules.

These restrictions were initially supposed to be temporary, but the FCA and other regulators announced stricter permanent rules, escalating its action against two industries that they argue most consumers lose money on its complex products. Over the past few months, an increasing number of European decided that the best way forward was rolling out a permanent ban on binary options which were seen merely gambling products dressed up as financial instruments.

The restrictions also curbed the industry profitability

However, the decision was a further blow to the struggling Online Trading sector as these speculative trading products are popular with their retail clients. As expected, the restrictions have heaped pressure on the industry, and already hurt the profitability of large UK brokers such as IG Group and CMC Markets.

The ESMA rules that Luxembourg’s regulators will adopt shortly introduce tiered leverage for retail clients, dropping CFDs on major pairs to 30: 1 while other CFDs shrink to 20: 1. Commodities and non-major indices trade with 10: 1 or lower leverage while Cryptocurrencies take the biggest hit, dropping to 2: 1.

The directive also mandates negative account protection, ensuring that customers can’t lose more than their trading stake, avoiding a repeat of the debacle following the 2015 Swiss Franc collapse. Finally, the rules will forbid bonuses and other incentives that may have encouraged overtrading in recent years.