European Financial Watchdog Restricts Leverage On Crypto Derivatives

Announcements, News, Regulation | March 28, 2018 By:

The European Securities and Markets Authority (ESMA), EU’s financial regulatory institution and European supervisory authority, said it will place restrictions on the marketing, distribution or sale of crypto-related contracts for difference (CFD).

In an announcement Tuesday, the ESMA said it has decided to temporarily adjust the leverage limit for crypto-related CFDs products to 2:1. The move means that investors must have enough funds to cover at least half of a contract value upon opening. The initial leverage limit for crypto-related CFD stood at 5:1, which allowed investors to enter the deal with only 20 percent of the CFD’s value on hand.

The EU markets watchdog will also impose restrictions on incentives offered to trade CFDs and mandated that brokers provide a standardized risk warning, including the “percentage of losses on a CFD provider’s retail investor accounts.”

“The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors,” said ESMA chair Steven Maijoor. “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 a risk warning for investors.”

UK online trading leader IG Group Holdings is disappointed that the ESMA has chosen to proceed with its proposal to impose disproportionate leverage restrictions. IG said the move will unduly restrict consumer choice, and risk pushing retail clients to providers based outside of the EU or to use other products which allow the leverage clients seek. It added that the decision may result in poor client outcomes.

The ESMA and other regulators have repeatedly warned of the risks involved with investing in cryptocurrencies. The regulator said they may consider tougher measures in the future in order to protect investors.

“Due to the specific characteristics of cryptocurrencies as an asset class the market for financial instruments providing exposure to cryptocurrencies, such as CFDs, will be closely monitored, and ESMA will assess whether stricter measures are required,” the regulator said.

In November 2017, the ESMA warned the public of the risks associated with initial coin offering (ICO) investments and reminded firms to ensure that their activities are compliant with relevant and existing legislation.