Cyprus financial regulator CySEC has issued a clarification circular (see full text below) following numerous inquiries it received in the wake of ESMA’s plans to move forward with new, restrictive rules governing online brokers.
ESMA’s new rules – finalized in late March and set (just as of last week) to come into effect in two stages in July and August – limit leverage on CFD and Forex trading to 30x for major FX pairs and less on non-majors, commodities, indices, share CFDs and cryptocurrencies (just 2x). The rules also ban Binary Options altogether, mandate margin close and negative balance protection, ban all trading “incentives” by CFD providers such as deposit bonuses, and require specific risk warnings be delivered to clients in a standardised way.
The CySEC note to licensed CIF brokers indicates very clearly that the new rules will apply not just to clients which brokers take from within the EU, but also very much applies to clients from outside the EU who deposit and trade with the EU-licensed broker.
Many EU licensed brokers maintain offshore subsidiaries and/or legal units in other regulated regions such as Australia, which still allow higher levels of leverage and deposit bonuses and other inducements. However, increasingly clients from other regions (such as China) are “getting smart”, and want their account to be with the FCA or CySEC licensed subsidiary, knowing that there is proper European oversight and protection of their accounts. As such, it has been increasingly more difficult for brokers to shunt their non-EU clients to offshore affiliates, where everything from capital levels required to trading rules are a lot more lax.
The full text of the CySEC circular from today follows:
TO: Cyprus Investment Firms
FROM: Cyprus Securities and Exchange Commission
DATE: 4 June 2018
CIRCULAR NO.: C271
SUBJECT: ESMA Product intervention Decision on CFDs and Binary Options
Further to the European Securities and Markets Authority’s (“ESMA”) product intervention decision on Contracts For Difference (“CFDs”) and Binary Options, which was communicated by the Cyprus Securities and Exchange Commission (“CySEC”) via an announcement dated 28 March 2018, CySEC wishes to inform the Cyprus Investment Firms (“CIFs”) that the measures on CFDs and Binary Options have been published in the Official Journal of the European Union (OJ) on Friday 1 June 2018.
The product intervention measures in relation to Binary Options apply from 2 July 2018 and in relation to CFDs from 1 August 2018.
ESMA has published a press release and a Q&A document on Friday 1 June 2018 on this topic.
Further to a number of queries received by CySEC on whether the ESMA product intervention measures would also apply in relation to services offered to third country residents, CySEC has escalated the issue to ESMA who have confirmed that the application of the product intervention powers under Article 40 of MiFIR are not limited to clients who are based within the EEA. ESMA explained that the MiFID II/MiFIR regime does not discriminate on the basis of the location of clients, but rather it applies to services provided by investment firms which are authorized in the EEA.
This position is in line with the European Commission’s guidance (EC’s Guidance) on the territorial scope of the MiFID I regime.
Specifically according to Question 47.2 and the respective answer of the EC’s Guidance:
“Do MiFID rules apply to customers who are not resident in the EEA?”.
Answer: “Yes. MiFID does not distinguish the obligations of firms to their clients according to the location of the client.”.
CySEC also wishes to remind CIFs of the content of Circular (C268) and to urge them to ensure that they will fully comply with the ESMA product intervention decision.
Yours sincerely
Demetra Kalogerou
Chairwoman of the Cyprus Securities and Exchange Commission