Cryptocurrency CFDs Limit Comes Into Force in EU

The European Securities and Market Authority (ESMA) 2:1 restriction will last three months, starting on August 1.

Cryptocurrency contracts for difference (CFDs) limit 2:1 was enforced on Wednesday in the European Union (EU). The measure will continue at least three months with possible renewal in November, the EU regulator European Securities and Market Authority (ESMA) said.

ESMA introduced the crypto restriction as part of wider intervention measures to CFDs and binary options (BOs) for retail investors, including different limits for CFDs and a ban for BOs. The contracts for difference restrictions are based on volatility and the virtual currency is seen as the most unstable as its leverage limit is set at 2:1. For comparison, the measure for fiat money CFDs is 30:1.

“This pan-EU approach is the most appropriate way to address this major investor protection issue. NCAs will monitor the impact of these measures during their application and will assess, with ESMA, what next steps are required,” Steven Maijoor, ESMA Chair, said in June when the EU adopted the final limits.

CFDs, which provide the possibility for margin trading in various assets without actually owning them, 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 more risky.

ESMA’s package of measures includes more provisions related to cryptocurrency CFDs, including the introduction of:

  • margin close-out rule on a per account basis with a standardized percentage of margin at 50% of minimum initial required margin;
  • negative balance protection on a per account basis with the aim to ensure an overall guaranteed limit on retail client losses;
  • restriction on the incentives offered to trade CFDs;
  • firm-specific risk warning, including the percentage of losses on a CFD provider’s retail investor accounts, delivered in a standardized way.

ESMA has been authorized to temporarily restrict or prohibit CFDs and BOs since an EU legislation framework came into force in January. The announced package of measures, which was adopted after public consultations, applies to any person marketing, distributing or selling CFDs or binary options to retail investors that need authorization under the EU law (so-called MiFiD II package), such as investment firms or proprietary traders.