The European Union has renewed the current contracts for difference (CFDs) restrictions for retail investors for another three-month period on consumer protection grounds, the European Securities and Markets Authority (ESMA) said on Friday. The regulatory package, which includes a 2:1 limit for crypto CFDs, will continue till the end of January next year.
ESMA introduced the CFDs limits on August 1 for an initial three-month period, but after a review of the measures, the regulator decided to extend the period. The 2:1 restriction for virtual coin contracts for difference makes them the instruments with the highest volatility compared to CFDs on traditional money, which are labeled as the securest because the limit for fiat pairs is 30:1. The closest restriction to crypto CFDs is the measure for individual equities, and other reference values as the limit on CFDs that use these instruments is 5:1.
The ESMA contracts for difference package includes several other measures that complement the limits:
a close-out margin rule per account basis with a standardized percentage of margin at 50% of the minimum initial required margin;
a protection for negative balance per account basis, the goal of which is to guarantee an overall protected limit on retail client losses
a limitation on the incentives offered to trade CFDs;
a firm-specific risk warning, including the percentage of losses on a CFD provider's retail investor accounts, delivered in a standardized way.
During the review process, several CFD providers told ESMA about problems in the risk warnings as third parties had imposed upon them character-count limitations. Therefore, the regulator introduced an additional reduced character risk warning:
“[insert percentage per provider] % of retail CFD accounts lose money.
The new warning will be allowed only in cases where the standard terms of a third party marketing provider have a character limit which is lower than the number of characters comprising the full or the abbreviated risk warning, provided that the advertisement also links to a webpage of the provider on which the full risk warning is disclosed,” ESMA explained.
CFDs are instruments that provide the possibility for margin trading in various assets without actually owning them. These financial tools give investors the chance to make quicker and higher profits with small investments than traditional trading, but also bear a much higher risk of losses, which could be huge. CFDs have been gaining popularity also in the highly volatile crypto market, which makes them even riskier.