Retail derivatives, such as crypto derivatives, that aren’t explicitly marketed as contracts for difference (CFDs) may nevertheless have to adhere to the investor protection measures that target CFDs, European regulators say.
The European Securities and Markets Authority (ESMA) issued a policy statement highlighting the potential application of certain product intervention measures for CFDs — including leverage limits, risk warnings, investor loss protections and compensation limits — to other kinds of products, namely derivatives that provide leveraged exposure to underlying assets, such as cryptoassets.
The regulators reported that they are seeing increased offerings of derivatives — which are often marketed as “perpetual futures or perpetual contracts” — that provide investors with leveraged exposure to cryptoassets such as bitcoin and ethereum.
“These financial instruments are likely to fall within the scope of the existing national product intervention measures on CFDs,” ESMA said — adding that any investment vehicle that meets the definition covered by the CFD rules, based on the product’s features, is subject to the same added investor protections, regardless of what the product is called, or how it’s marketed.
Indeed, the names that firms use for products are “irrelevant” it said, adding that “firms must conduct a careful legal analysis of these products and their functioning, in order to check whether they may fall within the scope of application of product intervention measures.”
This analysis must also adhere to the overarching obligation to act in the best interests of clients, ESMA noted.
Additionally, the regulator stressed that firms must identify, manage, and avoid conflicts of interest when offering these kinds of products; that “given their complexity” these products should have a narrow target market, supported by an aligned distribution strategy; and that firms must carry out “appropriateness assessments” for complex financial instruments that are being sold without advice.