The Malta Financial Services Authority (MSFA) has followed the UK’s lead by restricting the marketing, distribution or sale of contracts for differences (CFDs) to retail investors.
Contracts for difference are a form of derivative trading, which enable investors to speculate on the rising or falling prices of fast-moving indices, commodities, shares and treasuries.
This restriction follows a consultation process which the MFSA held with the industry earlier this year and also the temporary restrictions applied by the European Securities and Markets Authority (Esma).
MFSA’s head of conduct supervision, Dr Michelle Mizzi Buontempo, said: “These rules, in line with the MFSA’s Vision, seek to strike a balance between the market’s need to provide fair competition and client choice, while at the same time protecting consumers of financial services, and safeguarding the integrity and stability of the financial system.”
Details
The permanent restrictions, introduced in the MFSA’s Conduct of Business Rulebook, include requirements that ensure that investors do not lose more money than they put in.
Moreover, there also restrictions on incentives offered to trade in CFDs and investors must be provided with understandable risk warnings so that they are aware of the high degree of risk involved when investing in such products.
The marketing, distribution or sale of CFDs to retail clients is restricted to circumstances where all of the following conditions are met:
- The regulated person requires the retail client to pay the initial margin protection;
- 50% of the notional value of the CFD when the underlying is a cryptocurrency; or
- 20% of the notional value of the CFD when the underlying is a share or not listed in the rules.
Any regulated firm cannot directly or indirectly provide the retail client with a payment, monetary or excluded non-monetary benefit in relation to the marketing, distribution or sale of a CFD, other than the realised profits on any CFD provided.
They also cannot directly or indirectly a communication publish information accessible by a retail client relating to the marketing, distribution or sale of a CFD, unless it complies with requirements.
Historical context
The European market has witnessed an increase in the marketing, distribution or sale of CFDs to retail clients across the EU.
CFDs are inherently risky and complex products. European regulators have expressed widespread concerns on the increasing number of retail clients trading in these products and having them losing their money.
These concerns are also supported by the numerous complaints received from retail clients across the EU who have suffered significant losses when trading CFDs.
