The European Union’s financial markets watchdog, European Securities and Markets Authority (ESMA) have changed the leverage limit of cryptocurrency CFDs to 2:1 along with prohibiting their marketing, distribution, and sales.
ESMA puts more restrictions on crypto CFDs
The European Securities and Markets Authority (ESMA) announced its plans to restrict the sales of CFDs i.e. Contract for Differences in cryptocurrencies and ban the sales of binary options to retail investors.
The watchdog of the European Union’s financial markets said that it was prohibiting the marketing, distribution, and sale of both binary options and CFDs over the concern of European retail investors suffering substantial losses because of the complexity of the product.
The chair of ESMA, Steven Maijoor stated that this new measure will guarantee the investor protection all across the EU through a common minimum level of retail investors’ protection. He further explained:
“The new measures on CFDs will for the first time ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide risk warning for investors. “
The CFDs are best known for allowing investors to speculate on the short-term price movements of a particular asset such as stock, commodity or currency, without actually owning them. CFDs tend to be highly leveraged that means gains can way over exceed the original investment but the same goes for the losses.
The restriction on CFD will be conclusive of margin closeout rules, leverage limits, the requirement for companies that sell them to provide the investor’s risks warnings and on the basis of per account negative balance protection.
Cryptocurrency CFDs leverage limit is now 2:1
A method that is considered an easier one for settlement as it involves the cash payment of gains and losses resulted from the difference in settlement doesn’t involve any delivery of physical goods or services. The investor gets the same benefits and risks as of a security but without actually owning any.
The leverage limit of the cryptocurrency CFDs will now be 2:1 that means at the opening the investors need to have enough funds to cover about half of the contract value. The leverage limit initially was fixed at a rate of 5:1 that would have allowed the investors to have about 20 percent of the CFD value on hand in order to enter a deal.
However, the leverage limit varies as per the underlying assets’ volatility. For cryptocurrencies, it is 2:1, 20:1 for gold, major indices, and non-major currency pairs and 30:1 for major currency pairs.
Moreover, the restrictions will also be put on the incentives that are offered to trade CFDs along with standardizing the margin percentage i.e. 50 percent of the minimum required margin.
In January, ESMA interfered in the cryptocurrency CFDs by issuing a call for evidence while claiming that the high price variation in cryptocurrencies is causing investor protection concerns and warned consumers of the high risks associating with cryptos.
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I am an entrepreneur and a writer with a bachelors degree in Computer Science. I manage the blockchain technology and crypto coverages at Coingape. follow me on Twitter at @arya_achal or reach out to me at achal[at]coingape.com.