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There are currently a number of temporary restrictions in place on the sale of leveraged derivatives products to retail traders by firms in the UK or brokers selling into the UK. These include a ban on binary options trading and restrictions on the marketing and sale of Contracts for Difference (CFDs), and similar products like financial spread bets, to the retail market. These restrictions have been partly driven by the European Securities and Markets Authority (ESMA), which is the pan-European body representing European financial regulators.

The FCA is currently consulting with brokers but also wants to hear from private traders on whether it should make these temporary restrictions more permanent. The focus is really on the way derivatives like CFDs and financial spread bets have been sold to the general public. The FCA is concerned that many novice traders have been encouraged to open high risk, leveraged trading accounts without fully understanding the risks, and this has led to high losses.

“We remain very concerned about the harm to retail consumers that’s being caused by the design and distribution of some complex derivative products,” says Christopher Woolard, Executive Director for Strategy and Competition at the FCA. “This is despite focused supervisory work over several years to try and improve firms’ conduct. Today’s proposals will enhance consumer protection by banning binary options and ensuring CFDs are only marketed and sold to consumers who understand the risks from trading these types of products.”

There are a number of proposals on the table as part of the FCA’s package of reforms to retail derivatives broking in the UK:

  • The limit of leverage to between 30:1 and 2:1 by collecting minimum margin as a percentage of the overall exposure that a CFD provides
  • Brokers will have to close a customer’s account when it falls to 50% of the minimum margin required to fund their open positions – i.e. no more running up losses large than the funds you already have on account
  • Protections will have to be put in place to guarantee that traders cannot lose more than the money they have on account already
  • Brokers will not be able to offer monetary and non-monetary inducements to open an account
  • The standardised risk warning, which tells traders what percentage of retail clients are losing money with that broker, will become a permanent thing.

The FCA reckons that the reforms could reduce losses by retail traders in the UK by between £267.4 million and £450.7 million. The binary options ban could save a further £17 million, as well as help to curb fraudulent organisations claiming to offer binary options trading.

The FCA is also consulting on whether the ban should be extended to futures trading as well. The consultation papers on binary options and CFDs are open until 7 February while the paper on other OTC and complex retail derivatives products is open until 7 March. Private traders may provide their own feedback to the FCA.

The FCA is also at pains to point out that some other trading products are falling within the remit of this consultation paper, including “closely substitutable products” that have a similar pay out structure and risk features to CFDs. The FCA is also going to consult shortly on the sale of CFDs that are linked to cryptoassets like Bitcoin and Ethereum.

Further reading for Armchair Traders:

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Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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