The European Securities and Markets Authority (ESMA) has announced today that the new restrictions on the provision of contracts for differences (CFDs) to retail investors will take effect as of August, 1. The measures include a leverage cap of 1:30, as well as provision of negative balance protection on a per account basis, among others.

Additionally, ESMA also introduces a ban on binary options trading as of July 2, 2018. The new regulations have already been published in the Official Journal of the European Union (OJ) and will remain in force for three months from the date of application.

More specifically, the restrictions on the provision of CFDs to retail clients include:

1. A leverage cap, depending on the underlying asset:

· 30:1 for major currency pairs;

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

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

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

· 2:1 for cryptocurrencies;

2. A margin close out rule on a per account basis. According to it, CFD providers are required to close out one or more retail client’s open CFDs at 50% of the minimum required margin;

3. Negative balance protection on a per account basis. This means that investors cannot lose more than they have deposited;

4. A restriction on the incentives offered to trade CFDs;

5. A standardized risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

“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,” commented ESMA’s Chairperson, Steven Maijoor.

The pan-European financial regulator has been planning to introduce a set a restrictions on retail trading in CFDs, as well as a ban on binary options for quite some time. Its plans have been officially announced earlier in March. Although ESMA can only introduce temporary three-month measures (as per the MiFIR,), the regulator will review the results and may impose a further extension for another three months.