Resolution of 11 July 2023 by the National Securities Market Commission on product intervention measures for CFDs and other leveraged products

III. OTHER PROVISIONS
COMISIÓN NACIONAL DEL MERCADO DE VALORES
16394 Resolution of 11 July 2023, of the National Securities Market Commission, on product intervention measures relating to financial contracts for differences and other leveraged products.

The CNMV adopted in 2019 the Resolution of 27 June, on product intervention measures relating to binary options and financial contracts for differences. With regard to CFDs, this resolution, still in force, gave continuity to the temporary nature measures adopted by ESMA through Decision (EU) 2018/796 of the European Securities and Markets Authority, and its quarterly renewals, which were maintained for a total period of twelve months.

In summary, the 2019 intervention measures establish that the marketing, distribution, and sale to retail clients of CFDs is restricted to compliance with the following conditions:
– Requiring the provider to charge the client the payment of the initial margin according to fixed limits, which implies a limitation on the maximum permitted leverage (1/30 for relevant currencies, 1/20 for other currencies, gold, and relevant stock indices, 1/10 for commodities or non-relevant stock indices, 1/2 for cryptoassets, and 1/5 for shares or other assets not included in the remaining groups).
– Providing the retail client with position closure protection, when the value of the client’s position falls below half of the initial margin provided.
– Providing the retail client with protection against negative balances.
– Prohibition of providing, directly or indirectly, to the retail client a payment, monetary benefit, or non-monetary benefit excluded in relation to the marketing, distribution, or sale of a CFD.
– Including an adequate risk warning according to established models, stating that CFDs are complex instruments and are associated with a high risk of losing money quickly due to leverage, and reporting the percentage of retail investors who lose money when trading CFDs.

In Spain, these measures established since 2018 and currently in force resulted in an initial reduction in contracting by retail investors in CFDs, but they have not halted very aggressive advertising activity on these products, disseminated massively to the general public via the internet and social networks with images and messages giving the misleading impression that they were suitable products for any investor.

These commercial practices identified by the CNMV in its supervisory activities have reduced the effectiveness of the restrictions established for the marketing, distribution, or sale of CFDs with the aim of adequately protecting the retail investor and the repeated warnings issued regarding this instrument. According to available information from entities reporting to the CNMV for having a establishment in Spain, CFDs continue to be the main derivative product marketed to retail clients, despite being a product generally unsuitable for this type of investor. Furthermore, recent analyses referring to both Spain and other countries in our vicinity show that a high percentage of retail clients continues to incur losses on these complex and risky products.

For all these reasons, without prejudice to other coordinated measures that might be established at the European level, the CNMV considers that the measures taken to date have not been sufficient in protecting the retail investor in Spain, so it is necessary to adopt additional measures to reinforce the protection of retail investors, as already occurs in other jurisdictions.

Some countries in our vicinity have established more restrictive regimes than those contemplated in the ESMA measures of 2018 and CNMV measures of 2019, through measures applicable to other similar risk instruments in addition to CFDs and focusing on their distance distribution and advertising. In particular, Belgium prohibited in 2016 generally the distribution to retail clients through electronic platforms and the use of a series of aggressive techniques, such as the use of call centers to contact clients or certain remuneration techniques for sales staff. On its part, France also prohibited in 2016 advertising communications by electronic means initiated by the entity that may be directed to retail clients.

More recently, other European supervisors have adopted restrictive measures on the marketing of instruments other than CFDs, but also of a complex nature involving leverage. Thus, in 2021 the Netherlands adopted measures regarding so-called turbos, consisting basically in establishing leverage limits, the obligation to publish specific risk warnings, and the prohibition of providing investors with monetary or non-monetary benefits that constitute pernicious incentives for their marketing.

On its part, Germany processed in 2022 a restrictive measure on the marketing, distribution, and sale to retail clients of traded futures that may imply obligations to pay additional amounts to those deposited by clients.

On 28 November 2022, the CNMV initiated the public consultation period on possible intervention measures, the response deadline of which concluded on 31 January 2023, during which it received about twenty responses from both investment services intermediaries and their representatives, consumers and media, as well as from some individuals. The comments received have been taken into account in the modification of the initial proposal for the adoption of additional measures on the marketing, distribution, and sale of CFDs and other leveraged instruments to retail clients.

The measures established by the CNMV in this resolution meet the requirements provided for in Article 42 of Regulation (EU) No 600/2014 for their adoption, including the evaluation of the criteria and factors provided for in Article 21 of Delegated Regulation (EU) No 567/2017, in particular the existence of a significant concern for investor protection, the non-existence in legislation of other alternative responses that are sufficient to address the problem, the proportionality of the measure, and its non-discriminatory effect.

Prior to the implementation of the measures contained in this resolution, the CNMV has complied with the requirement to communicate them to ESMA and the rest of the competent authorities for their knowledge, at least one month before their entry into force.

The resolution is composed of two parts, one on CFDs and another on other leveraged instruments, in addition to a final section referring to the date of application.

The first part establishes a prohibition of advertising communications regarding CFDs directed to retail clients or the general public. It also establishes the prohibition of sponsoring events and organizations and brand advertising, including the use of persons of public relevance by entities marketing CFDs, except in those cases where this activity is very small compared to the general activity of the entity. Finally, it establishes a series of restrictions on remuneration policies, as well as the methods of cash deposits by clients.

This resolution, like the ESMA resolution of 2018 and the CNMV resolution of 2019, considers that CFDs include, among others, spot forex contracts (rolling spot forex) and financial spread bets, whether or not traded on a market. On their part, warrants and turbos would not fall under the definition of CFDs.

The scope of application generally covers the activity of marketing, distribution, and sale in Spain by the included instruments, including therefore the activity in free provision and through branches or agents in Spain by entities from other member states. However, in the case of CFDs that have as underlying cryptoassets that do not have the status of a financial instrument subject to MiFID regulations, the measure is additionally extended to the activity carried out by Spanish investment service companies in other member states, given the high risk they entail.

The measure prohibiting the offer of courses and seminars free of charge or at a symbolic cost could be considered already included in the CNMV Resolution of 2019. Nevertheless, it has been deemed appropriate to clarify this issue in the text of the resolution by expressly prohibiting the offer of training directed to the general public, as well as to demo accounts or similar tools, whose common characteristic is to attract retail clients to invest in these complex and high-risk products. The prohibition does not extend to training directed specifically to clients with knowledge and experience.

The second part establishes specific intervention measures for other leveraged products, such as futures and options, for which it is considered necessary to impose leverage limits and position closure when the value of the position is reduced to half of the initial margin, measures that were established together with others for the case of CFDs in the ESMA decision of 2018 and the CNMV measures of 2019 (restriction of initial margin and position closure protection).

In the case of instruments traded on trading venues, generally, the restriction of the initial margin will apply to the lower of the amounts between the margins required by the trading venue and those collected in this resolution for each type of instrument by reference to the CNMV Resolution of 2019. However, in the case of instruments whose underlying is a cryptoasset that does not have the status of a financial instrument subject to Directive 2014/65/EU (MiFID), the initial margin cannot be lower than that collected in this resolution, even if the one established in the trading venue could be lower. On the other hand, as established in the first part referring to CFDs, given the high risk entailed by this underlying, the measure is additionally extended to the activity carried out by Spanish investment service companies in other member states.

Leverage is the factor that most contributes to a large part of retail clients investing in these instruments incurring risks that are not adequately valued and that ultimately materialize with the generation of losses.

The limitation on leverage is complemented by the position closure protection with the aim of achieving a double objective: on the one hand, it is necessary to liquidate the instruments when the value of the client’s position is reduced to half of the initial margin, thus limiting the generation of losses, but on the other hand, it is clarified that this should not occur before reaching this threshold to avoid that losses materialize too quickly.

As already indicated in the 2019 resolution, the CNMV considers it good practice for entities to establish an adequate policy for determining additional margins, so that investors can be warned before reaching the 50% threshold of the initial margin that establishes the obligation of position closure and can, therefore, provide additional margins or, if applicable, close the position, before reaching said threshold.

Regarding the date of application, it is established generally at twenty days from its publication in the BOE, and special cases are established for sponsorship contracts or brand advertising that are in force on the date of publication.

The Executive Committee of the CNMV, making use of the powers corresponding to the CNMV in matters of product intervention and practices or financial activities provided for in Articles 40 to 42 of Regulation (EU) No 600/2014, of the Parliament and of the Council, of 15 May, in its meeting of 11 July 2023, has agreed, after public consultation and report of the Advisory Committee, the following resolution:

First. Additional measures on financial contracts for differences.
Definitions.
For the purposes of the first part of this resolution, the following shall be understood:
a) Subject instruments: financial contracts for differences (hereinafter, CFDs), according to the definition collected in the CNMV Resolution of 27 June 2019. b) Subject services: investment services of Article 125 of the Securities Markets and Investment Services Law referred to subject instruments as the object of investment. c) Advertising communication: any form of transmission of information, verbal or visual, intended to promote directly or indirectly the subject instruments and services, regardless of the means of communication, supports, and advertising formats used, such as television, cinema, radio, press, telephone, internet (in any of its forms, including social networks, video channels, audios, news, blogs, search engines, specialized platforms, or websites), mobile devices, all types of outdoor advertising, direct advertising, point-of-sale advertising, brochures, catalogs, promotional gifts, loyalty campaigns, home visits, or any other form of commercial communication.

Scope of application.
The first part of this resolution applies to entities authorized to provide investment services in Spain regarding all activity of marketing, distribution, and sale of the subject instruments and services to retail investors in Spain, regardless of the origin of the entity that markets and distributes these products or the existence or not of a branch in Spain. In the case of subject instruments whose underlying is a cryptoasset that does not have the status of a financial instrument subject to MiFID regulations, the resolution will also apply to the activity carried out by investment companies when operating in other EU states.

Prohibition of advertising communications directed to retail clients or the general public.

1. The marketing, distribution, or sale of the subject instruments and services by means of advertising communications directed to retail investors in Spain, including potential clients, regarding the subject instruments and services is prohibited.
2. In any case, the following shall be considered included among the prohibited advertising communications:
   a) Those that redirect to a web page that offers subject instruments or services; b) Those that direct to a contact form, the download of an application, or any other type of tool intended to put the client in contact with a provider of investment services that offers this type of instruments or services; c) Those that present offers to the general public of training, technical seminars, courses, and events when these offers are related to the subject services or instruments, as well as demo accounts or similar training tools for retail investors or the general public or that promote investment in them if these offers are made free of charge or for a symbolic price, whether promoted or held by the obligated subjects or by parties linked or affiliated with them.
3. The following are excluded from the scope of this resolution:
   a) The provision of information in response to a request initiated exclusively by the client, regarding the subject products or services. It is the responsibility of the investment service provider to keep the elements (letters, emails, telephone records, etc.) that prove that the initial request comes from the client. b) The informational content necessary for the contracting of products or services subject to this Resolution, or for the execution of an operation on said products, such as pre-contractual and contractual information or information or warnings about the characteristics and risks of the products or services offered that are provided to investors in compliance with information obligations, through any support, including the entity’s website. Likewise, and without prejudice to compliance with what is established in Article 44 of Delegated Regulation EU 2017/565 of 25 April 2016, legal information sent to clients or published on the website regarding objective data of a financial instrument (for example, product information sheets) that do not include subjective elements are excluded from having the status of advertising communication.

Prohibition of sponsorship of events and organizations and brand advertising.
Any sponsorship of events or organizations and brand advertising is prohibited, including the use of persons of public relevance, when its object or effect is the direct or indirect advertising of instruments or services subject to this Resolution, except when it is demonstrated that these sponsorships or brand advertising do not have the object of offering said products or services, particularly when it is demonstrated that such products or services are only a very small part of the offers of the subject entity compared to its general activity.

Prohibition of certain commercial practices.
The following commercial practices on subject instruments and services are prohibited:
a) Remuneration to clients who bring new retail clients; b) Remuneration to the own or third-party commercial network dedicated to the capture and marketing that is determined, directly or indirectly, in whole or in part, based on the number of clients captured, client cash revenues, revenues of the investment service provider, or client losses, and in general, any form of remuneration that generates a conflict with the interests of clients; c) Use and remuneration of collaborators for the training of new potential clients, without the latter having accredited knowledge and experience; d) Use of own call centers or operated by third parties that contact clients or potential clients for the promotion of the provision of investment services on the instruments subject to the restriction; e) Use of software in which the remuneration to the providers of said software is determined, directly or indirectly, in whole or in part, based on client cash revenues, or distributor revenues or client losses; f) Acceptance of the realization of cash deposits by clients by means of credit cards.

Second. Restrictive measures applicable to other leveraged instruments.
Definitions.
For the purposes of the second part of this resolution, the following shall be understood:
a) Subject instruments: financial instruments, other than those indicated in the first part of this resolution, whose maximum risk is not known at the time of subscription or whose risk of loss is greater than the amount of the initial financial contribution. b) Subject services: investment services of Article 125 of the Securities Markets and Investment Services Law referred to subject instruments as the object of investment.

Scope of application.
The second part of this resolution applies to entities authorized to provide investment services in Spain regarding all activity of marketing, distribution, and sale of the subject instruments and services to retail investors in Spain, regardless of the origin of the entity that markets and distributes these products or the existence or not of a branch in Spain. In the case of subject instruments whose underlying is a cryptoasset that does not have the status of a financial instrument subject to MiFID regulations, the resolution will also apply to the activity carried out by investment companies when operating in other EU states.

Restrictive measures applicable to subject instruments.
The marketing, distribution, or sale to retail clients of subject instruments is restricted to compliance with the following conditions:
a) That the provider of the instrument requires the retail client to pay the initial margin.
Initial margin is understood as the lower amount between the following amounts:

1. The corresponding according to the type of underlying of those indicated in the CNMV Resolution of 27 June 2019, on product intervention measures relating to binary options and financial contracts for differences.
2. The amount required by the trading venue where the instrument is traded.
   Notwithstanding the above, in the case that the underlying is a cryptoasset that does not have the status of a financial instrument subject to MiFID regulations, the amount of the margin cannot be lower than that determined according to point a).1 above, so it is not possible to apply the amount required by the trading venue indicated in point a).2 even if it is lower. b) That the provider of the instrument provides the retail client with "position closure protection". "Position closure protection" is understood as the liquidation of one or more of the open derivative instruments of a retail client under the most advantageous conditions for the client, when the sum of the funds in the operating account in these instruments and the net unrealized gains of all open derivative instruments associated with that account falls below half of the total initial margin provided for all those open instruments. The position closure must not take place before reaching said threshold and informing the client.