EU Adopts Final Version of Cryptocurrency CFDs Limit

The ESMA 2:1 restriction will last three months, starting on August 1

by Marin Marinov
01 June • 5 min
In Regulation

The European Securities and Market Authority (ESMA) has adopted the final version of 2:1 leverage limit for cryptocurrency CFDs (contracts for difference), the EU regulator announced on Friday. The restriction will start on August 1 and will be in place for three months with a possible renewal after analysis.

“The measures ESMA has taken today are a significant step towards greater investor protection in the EU. The new measures on CFDs will, for the first time, ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide understandable risk warnings for investors,” Steven Maijoor, Chair of ESMA, said in a statement.

The regulator 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 package was first announced in March.

“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,” Maijoor said on Friday.

one man in an official suit
Steven Maijoor, Chair of European Securities and Market Authority. Source:  © European Union, 2018 

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 crypto-related measures

ESMA’s CFD restrictions are based on volatility and cover five types of retail clients. Cryptocurrency leverage limit 2:1 views digital coin CFDs as the most volatile while the measure for fiat currency CFDs is 30:1.

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 and 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.

The measures are directly applicable, meaning that 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 May, Yyves Merch, a board member of European Central Bank (ECB), called on banks to separate their cryptocurrency business from other operations because of the “wild fluctuations” of digital coins. A month earlier, the EU adopted anti-money laundering measures for fiat-to-crypto exchanges.