The European Securities and Markets Authority (ESMA) announced on March 31, 2018, that it will impose temporary product intervention measures on contracts-for-difference (CFDs) and binary options offered to retail investors in the European Union. The most striking provision is a 2:1 leverage cap on cryptocurrency CFDs, coupled with a mandatory initial margin of 50% of the notional value.
Cryptocurrency CFDs Face the Strictest Rules
ESMA stated that CFDs with cryptocurrencies as an underlying raise "separate and significant concerns" compared to other CFD products. The regulator described cryptocurrencies as "a relatively immature asset class that poses major risks for investors," specifically citing concerns about "the integrity of the price formation process in underlying cryptocurrency markets," which it argued "makes it inherently difficult for retail clients to value these products."
Compared to other assets, the restrictions on crypto CFDs are the harshest. Under the new measures:
- Major currency pairs: 30:1 leverage
- Non-major currency pairs, gold, and major indices: 20:1
- Commodities other than gold and non-major equity indices: 10:1
- Individual equities and other reference values: 5:1
- Cryptocurrency CFDs: 2:1 leverage (50% initial margin)
The 2:1 cap means retail traders can only trade twice their deposited amount, significantly limiting potential losses. The 50% margin requirement is more than double that of any other CFD category.
ESMA Pledges Close Monitoring and Potential Further Action
ESMA concluded that "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." Based on its findings, the authority "will assess whether stricter measures are required," leaving the door open for even tighter regulation in the future.
The regulator stated it "intends to adopt these measures in the official languages of the EU in the coming weeks." Once adopted, all EU-based CFD providers must adjust their offerings, including leverage parameters, client agreements, and risk disclosures. Industry observers expect the rules to substantially reduce retail investor losses from crypto CFD trading, though they may also curb speculative activity.
Importantly, the measures apply only to retail clients; professional traders and eligible counterparties are exempt. National regulators within the EU may also impose stricter rules at the domestic level. The UK's Financial Conduct Authority (FCA) has already implemented similar restrictions, while regulators in France and the Netherlands are considering further action.