FCMC establishes permanent restrictions on contracts for differences and binary options to retail clients

01.08.2019
  • Section:
On 26.07.2019., the Board of Financial and Capital Market Commission (FCMC) has adopted new Regulation on Restrictions of the Marketing, Distribution and Sale of Contracts for Differences and Binary Options to Retail Clients in order to strengthen investor protection and to establish permanent requirements for investment firms and credit institutions with respect to contracts for differences (CFD) marketing, distribution and sale and the prohibition of binary options (BO) offering to retail clients in and from Latvia.

The new regulation have been made by the FCMC as from August 1, 2019 restrictions on CFD and binary options are no longer established by the European Securities and Markets Authority (ESMA), but by the national competent authorities, including the FCMC. The regulation take into account ESMA’s arguments that existing European Union (EU) regulation and supervisory measures are not sufficient to effectively address the lack of protection of retail clients involved in CFDs and BOs transactions. The regulation will limit the aggressive advertising, distribution and sales practices of investment firms and credit institutions towards retail clients, and will prevent the provision of inappropriate information that could result in retail clients misunderstanding the underlying risks of these products.

The restrictions contained in the regulation apply to:

1. Leverage limits for open positions of retail clients in the range of 30:1 to 2:1, which vary according to the volatility of the underlying assets:
• 30:1 for major currency pairs (any two of the following currencies: US Dollar, Euro, Japanese Yen, British Pound, Canadian Dollar or Swiss Franc);
• 20:1 for less important currency pairs, gold and major equity indices;
• 10:1 for commodities other than gold, commodity equity index or any other equity indices;
• 5:1 for a shares or other assets;
• 2:1 for cryptocurrencies;

2. The margin close-out protection in relation to the client account. This will provide a standardized percentage of the margin (50% of the initial margin) when the CFD provider is required to close one or more CFDs opened by retail clients;

3. Negative balance protection for each account. There will be guaranteed limit for private clients regarding their liability for losses;

4. Prohibition of CFD trading incentives (non-monetary benefits);

5. Standardized risk alert that shows the percentage of losses in the retail investor accounts of a particular CFD provider. Such a warning will allow using a limited character warning, provided that a link is made to the product provider’s website for the full text of the warning;

6. Prohibition of BO offering to retail clients.

The restrictions take effect on August 1, 2019. With the entry into force of this regulation, Latvia will join most EU Member States with similar restrictions after the expiry of the restrictions imposed by ESMA.

The regulations have been published in the Official Journal of the Republic of Latvia: https://www.vestnesis.lv/op/2019/154.1 (in Latvian only).

Further information:
Communications Division
Financial and Capital Market Commission
Phone: +371 67774808, +371 67774807
dace.jansone@fktk.lv

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