ESMA threat frightens off investors in financial spread betting shares

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Thanks to the European financial regulator’s announcement that it was considering imposing a ban on the sale of binary options, investors have turned away from placing their money into financial spread betting shares.

Further restrictions

ESMA has also threatened to impose further restrictions on selling ‘contracts for difference’. Contracts for difference allow investors to monitor the performance of an investment’s underlying asset, for example gold, an index, or a stock, without ownership of that asset.

The announcement caused shares in all the major spread betting companies to fall. Market leader, IG Group saw its shares fall by 15%, with Plus 500 and CMC Markets tumbling by 19%.

The UK’s FCA are set to relieve the Gambling Commission of responsibility for the regulation of the financial spread betting sector as from January 2018, a move that looks set to heap more misery on spread betting firms as it may move to ban binary options altogether, citing them as rife with fraud and scams.

Proposed CFD restrictions

ESMA is proposing to impose leverage limits on investors, whose limit would vary according to the assumed volatility of the asset that is underlying. A ‘margin close-out’ is also being considered that would effectively close a financial spread betting broker’s client’s position when their margin is compromised. These moves are designed to limit the amount of money that an investor stands to lose if a trade goes bad.

These proposals are seen by investors and industry experts as being overly restrictive when compared to those in the US and Japan.

IG Group stated that they thought the proposed restrictions would be ‘disproportionate’ and overly protective of consumers. The danger will potentially be that investors will move away from regulated UK firms to trade with unregulated and potentially unscrupulous companies that are based outside the EU.

IG were also keen to point out that it has less to lose than most of its competitors, because its client base has a growing number of high value customers. In addition, IG Group stopped providing binary options to its new customers earlier in the year. CMC has stated that they are in the same position, while Plus 500 were keen to stress that they do not ofter binary options.

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