ESMA announces temporary leverage limit for cryptocurrency CFDs

The EU regulator’s measure is part of wider restrictions on CFDs to retail investors.

by Marin Marinov
27 March • 3.5 min
In Regulation

The European Securities and Market Authority (ESMA) is imposing a temporary 2:1 leverage limit for cryptocurrency CFDs (contracts for difference). The restriction is for three months with an option to be continued after analysis, ESMA said in a statement published on Tuesday.

The EU regulator has 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 ESMA provisions for CFDs will take effect two months after they are published in the Official Journal of the EU.

black screens with different numbers

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 volatility-based limits

ESMA’s CFD restrictions are based on the volatility and covers five types of retail clients. Cryptocurrency leverage limit 2:1 makes digital coin CFDs the most volatile:

● 2:1 for cryptocurrencies;

● 5:1 for individual equities and other reference values;

● 10:1 for commodities other than gold and non-major equity indices;

● 20:1 for non-major currency pairs, gold and major indices;

● 30:1 for major currency pairs.

ESMA crypto-related measures

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

● margin close-out rule on a per account basis with 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.

Scope of the measures

ESMA has been authorized to temporarily restrict or prohibit CFDs or BOs since a EU legislation framework came into force in January. The announced package of measures 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.

white and blue paper with big letters
ESMA measure`s announcement/Image`s source: ESMA, © European Union, 2018

The measures are directly applicable that means member-states are not allowed to change them with national legislation. ESMA does not directly supervise adhering to rules and laws and this is an obligation of national regulatory bodies.

In February, The European Supervisory Authorities (ESAs), which includes ESMA, banking (EBA), and insurance and pensions (EIOPA) regulatory bodies, issued a pan-EU warning to consumers regarding the risks of buying virtual currencies. The move followed ESMA’s crypto-warning in November that declared initial coin offerings (ICOs) as “very risky and highly speculative investments”.

Note: Cover image`s source: EU, © European Union, 2012