A contract for difference (CFD) is an agreement between a ‘buyer’ and a ‘seller’ to exchange the difference between the current price of an underlying asset (such as shares, currencies and commodities amongst others) and its price when the contract is closed.

CFDs are considered to be leveraged products. They offer exposure to the markets while requiring you to only put down a small margin (‘deposit’) of the total value of the trade. Investors are thus allowed to take advantage of prices moving up, by taking ‘long positions’, or prices moving down, by taking ‘short positions’ on underlying assets.

ESMA’s Position

The European Securities and Markets Authority (ESMA) had issued a statement announcing that it will not renew its restrictions on selling CFDs to retail clients in Europe.

ESMA had begun to clamp down on trading brokers offering access to highly leveraged products to retail investors back in August 2018. Ever since then, ESMA has continued extending its substantial limitations. The latest one has since expired, on the 31st of July.

ESMA opines that national competent authorities (NCAs) may now take product intervention measures in accordance with Article 42 of Regulation (EU) No. 600/2014 on markets in financial instruments (MiFIR). A NCA must notify all other NCAs and ESMA of the details of its proposed measures and the related evidence in advance.

Despite this, ESMA will continue to monitor activities in relation to CFDs and other related speculative products to determine whether any EU-wide measures may be needed.

Malta’s Position

The Malta Financial Services Authority (MFSA) on its part notified ESMA of its intention to impose product intervention measures. The national measures consist of a permanent restriction on the marketing, distribution or sale of CFDs. The MFSA went on to confirm that the national measures intended to take place are the same as ESMA’s previous measures at national level. The national measures came into full effect from the 11th of August 2019.

The MFSA shares the reasons given in ESMA’s measures that the existing applicable regulatory requirements under Union law, which have not changed since the adoption of ESMA’s measures, do not address the concern. The MFSA considers that improved supervision or enforcement of the existing requirements would not better address the concern identified.

Thus, the MFSA went on to inform ESMA that it has taken into account the supervisory and enforcement of other experiences of other NCAs as referred to in ESMA’s measures and that its supervisory practices take into account the relevant guidance provided in the ‘Opinion on MiFID practices for firms selling complex products’, the ‘Opinion on structured complex products — good practices for product governance arrangements and the ‘Joint Position of the European Supervisory Authorities on manufacturers’ products oversight and governance processes’. Despite this, the MFSA has noted that significant concern on investor protection continues to exist.

The significant investor protection concern raised by the offer of CFDs to retail clients led to the adoption of the ESMA decisions. Given that such measures were temporary, the significant investor protection concern raised by these products exists at a national level. There is therefore the need for a longer-term basis to avoid the detrimental consequences that would arise from their unrestricted offer to retail clients.

Such a concern is nevertheless a cross-border issue. As evidenced by practices to date, providers are able to offer these products through online trading accounts and passport their services throughout the Union. In order to effectively tackle such a concern, as well as to avoid the risk of regulatory arbitrage, it is essential that product providers are not able to exploit differences in treatment by NCAs across Member States.

ESMA has, nonetheless, confirmed that the national measures to be implemented by the MFSA are justified and proportionate. It also opines that it is crucial for other Member States to take product intervention measures that are at least as stringent as ESMA’s measures.

Article written by Dr Cherise Abela Grech and Legal Trainee Ms Emma Sammut.

For more information please contact Mr Reuben Portanier on rportanier@afilexion.com, and Dr Cherise Abela Grech on cabelagrech@gtgadvocates.com

Disclaimer: This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.