Resolution of 27 June 2019 by the National Securities Market Commission on product intervention measures regarding binary options and contracts for difference

I. GENERAL PROVISIONS
NATIONAL SECURITIES MARKET COMMISSION
9737 Resolution of 27 June 2019, of the National Securities Market Commission, on product intervention measures relating to binary options and contracts for difference.

Binary options (hereinafter "BO") and contracts for difference (hereinafter "CFD") are financial instruments that are especially complex, characterized fundamentally by their complexity and high risk, and by their high short-term volatility. In the case of CFDs, they are also instruments with leverage in which the investor may incur losses exceeding the amount initially paid.

CFDs and BOs are products that are generally offered to retail investors through electronic trading platforms, without the provision of investment advice or portfolio management services. The assessment of suitability required by current regulations allows the client to make the investment, after making the corresponding warnings, even in cases where the client has not provided sufficient information about their knowledge and experience, or when the intermediary has concluded that the product is not suitable for the investor.

Due to the difficulty in understanding their characteristics and risks, these products are not suitable for most retail clients and, therefore, should not be marketed widely among them. Frequently, the prices, costs, and trading conditions of CFDs and BOs are not sufficiently transparent, which harms the ability of retail investors to adequately understand the terms of the products and to evaluate the expected return and risks assumed.

In the marketing of these products, intermediaries often emphasize the positive aspects, giving less relevance in the message to information about risks and their complexity. Deceptive marketing campaigns, aggressive marketing strategies, and inappropriate practices (commercial benefits to attract and encourage investment in these products, giving gifts, reduced commissions, etc.) have been identified, which act by diverting attention from the high-risk nature of the products. Furthermore, the promotion of these products, through sponsorship agreements with very popular sports teams and the dissemination of deceptive commercial messages in the media and through websites, aims to raise awareness and generate demand for these products among retail clients, when due to their complexity and risk they are not their target audience.

BOs allow making a bet on the short-term movement of the price of one or more underlying assets, expressed in terms of two predefined scenarios, and therefore do not respond to any genuine investment need for investors. Generally, BOs have a very short maturity and their purpose is purely speculative. As financial instruments that present characteristics closer to gambling than to financial investments, BOs contribute to creating addictive behaviors among investors.

Leverage is the factor that most contributes to the fact that a large number of retail clients are unaware of the high risk to which they are exposed when investing in CFDs. This is because it increases the probability that the investor will not have sufficient guarantees to maintain their open positions in the face of fluctuations in the prices of the underlyings, so the automatic closure of their positions and losses that exceed the amounts paid by clients as a guarantee frequently occurs.

Likewise, leverage also makes it difficult for the investor to understand the impact on the foreseeable return of the commissions and spreads they bear, as these are usually applied to the notional amount of the transaction and not on the guarantees delivered by the client.

In this scenario, a large number of competent national authorities, including the CNMV, have expressed their concern about the growth in the distribution of CFDs and BOs to the segment of retail clients, despite being complex products and inadequate for the vast majority of them. Both ESMA and the CNMV have issued several warnings to investors highlighting the risks and the high probability that clients will suffer losses when investing in these financial instruments. In the case of the CNMV, various measures have also been adopted to address these concerns.

In parallel with the development of these initiatives, the CNMV has been part, along with other competent national authorities, of the working group created by ESMA in 2015 to supervise the marketing of these products and promote homogeneous supervisory approaches in the European Union. Once the detailed analysis that has been carried out on the marketing of CFDs and BOs since the establishment of the working group was completed, both ESMA and the national authorities concluded that there is currently still significant concern regarding investor protection concerning the marketing of these financial instruments to retail clients. Specifically, ESMA requested information on specific studies carried out by the various competent national authorities, including the CNMV, on the results of retail clients who invest in CFDs, the conclusions of which showed that between 74% and 89% of investors lose money when trading CFDs.

On 3 January 2018, with the entry into force of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments, the powers of ESMA and competent authorities have been expanded with an explicit mechanism that allows, subject to compliance with certain specific conditions, to prohibit or restrict the marketing, distribution, and sale of any financial instrument that raises significant concern regarding investor protection.

Using this new power and to respond to the existing concern regarding the marketing of CFDs and BOs to retail clients, on 22 May 2018 ESMA adopted the decision to prohibit the marketing, distribution, or sale of BOs to retail investors in the European Union from 2 July 2018 and the decision to restrict the marketing, distribution, or sale of CFDs to retail investors in the European Union from 1 August 2018. These decisions, taken in accordance with Article 40 of Regulation (EU) No 600/2014, prevail over any measures previously developed by competent authorities, will be applied temporarily for a period of three months from their entry into force. ESMA has proceeded to renew these measures on three occasions as significant concern regarding investor protection persists.

For the reasons stated above, the CNMV considers that there is currently still significant concern regarding investor protection concerning the CFDs and BOs offered to retail clients. The CNMV fully shares the Decisions adopted by ESMA and considers that the power of product intervention is the most appropriate tool to address these problems and ensure that retail investors in the European Union have a common level of protection.

With the aim of providing stability to the decisions adopted by ESMA, the CNMV considers it appropriate to adopt a resolution that allows the implementation of these in Spain indefinitely, subject to review if market circumstances change, and clarifies their form of application in the context of our regulatory framework, especially their interaction with Circular 1/2018 of 12 March, of the CNMV, on warnings relating to financial instruments.

The measures proposed by the CNMV in this resolution coincide with those adopted by ESMA, thus meeting 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, such as the existence of significant concern regarding 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. The CNMV has taken into account all the arguments exposed in the ESMA Decisions, as well as the supervisory experience of other competent national authorities also exposed in those Decisions.

With regard to the consultation of public bodies competent in matters of supervision, management, and regulation of physical agricultural markets pursuant to Regulation (EC) No 1234/2007, as established in point f of Article 42.2 of the Regulation, since ESMA carried out such consultation without any objection or comments from competent Spanish public bodies, the CNMV has not considered it necessary to carry out a new consultation in this regard, concluding that there is no serious threat to the integrity and orderly functioning of the physical agricultural market.

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 competent authorities for their knowledge, at least one month before their entry into force.

These measures will apply to all marketing, distribution, and sale activities of these products to retail clients resident in Spanish territory, regardless of the origin of the entity marketing and distributing these products or the existence or non-existence of a branch in Spain. Likewise, they will apply to Spanish entities that market, distribute, or sell these products in other Member States of the Union. In the event that entities are subject to this resolution and to intervention measures of another Member State and these differ from each other, the stricter ones will apply.

This resolution, like the ESMA Decision, considers that CFDs include, inter alia, spot forex contracts (rolling spot forex) and financial spread bets, whether or not traded on a market. Likewise, warrants and turbos are not within the scope of application, but securitized derivatives that are CFDs are not explicitly excluded.

With regard to the interaction of the measures established in this resolution with CNMV Circular 1/2018, the requirement to obtain the handwritten text or verbal recording of the retail client will be maintained, for at least the first two position opening operations, in accordance with the aforementioned Circular, which must accompany or be typed together with the new text of the warning contained in this resolution, which replaces the text provided for in the Circular for the case of CFDs. By means of this resolution, this requirement to obtain the handwritten text or verbal recording from the client is extended to entities operating under the freedom to provide services in Spain.

Finally, the CNMV will consider it good practice for entities to establish an adequate policy for determining additional guarantees, so that investors can be warned before reaching the 50% threshold of the initial guarantee that establishes the obligation to close the position and can, therefore, provide additional guarantees or, if applicable, close the position, before reaching said threshold.

In accordance with what is provided for in letter p) of number 2 of Article 234 of the Consolidated Text of the Securities Market Law, the Council of the CNMV, using the powers corresponding to the CNMV in matters of product intervention and financial practices or 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 27 June 2019, has agreed, after public consultation and report of the Advisory Committee, the following Resolution:

CHAPTER I
Binary Options

Article 1. Prohibition of binary options for retail clients.

1. The marketing, distribution, or sale of binary options to retail clients is prohibited.
2. For the purposes of paragraph 1, regardless of whether it is traded in a trading venue or not, a binary option is a derivative that meets the following conditions:
   (a) it must be settled in cash or may be settled in cash at the option of one of the parties, for reasons other than default or another event leading to the termination of the contract; (b) payment is only foreseen at closure or at maturity; (c) the payment is limited to:
   i) a predetermined fixed amount or zero if the underlying of the derivative meets one or more predetermined conditions; and ii) a predetermined fixed amount or zero if the underlying of the derivative does not meet one or more predetermined conditions.
3. The prohibition in paragraph 1 does not apply to:
   (a) a binary option for which the lower of the two predetermined fixed amounts is at least equal to the total amount paid by a retail client to acquire the binary option, including any commission, transaction cost, and other related costs; (b) a binary option that meets the following conditions:
   i) the period from issuance to maturity is equal to or greater than 90 calendar days; ii) a prospectus drawn up and approved pursuant to Directive 2003/71/EC of the European Parliament and of the Council (1) is available to the public; and iii) the binary option does not expose the provider to market risk until its maturity and the provider – nor any entity in its group – records profits or losses with the binary option except for commissions, transaction costs, or other related costs indicated to the client in advance.

Article 2. Prohibition of participating in evasion practices.
It is prohibited to participate, consciously and deliberately, in activities that have as their object or effect the circumvention of the requirements provided for in Article 1, including acting as a substitute for the binary options provider.

CHAPTER II
Contracts for Difference

Article 3. Definitions.
For the purposes of this resolution, the following shall be understood as:
(a) "contract for difference" or "CFD" is a derivative instrument other than an options contract, futures, swaps, or agreements on future interest rates whose purpose is to offer the holder long or short exposure to fluctuations in the price, level, or value of an underlying instrument, regardless of whether it is contracted in a trading venue, and which must or may be settled in cash at the choice of one of the parties for reasons other than default or another termination condition of the contract; (b) "excluded non-monetary benefit" is any non-monetary benefit relating to CFDs other than providing information and analysis tools; (c) "initial guarantee" is any payment for the purpose of entering into a CFD, excluding transaction commissions or any other related cost; (d) "initial guarantee protection" is the initial guarantee determined in Annex I; (e) "position closure protection" is the settlement of one or more of the open CFDs of a retail client under the most advantageous conditions for the client, pursuant to Articles 24 and 27 of Directive 2014/65/EU, when the sum of the funds in the CFD trading account and the net unrealized gains of all open CFDs associated with that account falls below half of the total initial guarantee provided for all those open CFDs; (f) "negative balance protection" is the limit of the aggregate liability of the retail client for all CFDs associated with a CFD trading account with a CFD provider for the funds deposited in said account.

Article 4. Restriction of CFDs for retail clients.
The marketing, distribution, or sale to retail clients of CFDs is restricted to compliance with all of the following conditions:
(a) That the CFD provider requires the retail client to pay the initial guarantee; (b) that the CFD provider provides the retail client with position closure protection; (c) that the CFD provider provides the retail client with negative balance protection; (d) that the CFD provider does not provide directly or indirectly to the retail client a payment, monetary benefit, or excluded non-monetary benefit in relation to the marketing, distribution, or sale of a CFD, other than the benefits obtained in the CFD trading itself; and (e) that the CFD provider does not directly or indirectly send a communication to a retail client or publish information accessible to them regarding the marketing, distribution, or sale of a CFD unless it includes an adequate risk warning that complies with the conditions specified in Annex II.

Article 5. Prohibition of participating in evasion practices.
It is prohibited to participate, consciously and deliberately, in activities that have as their object or effect the circumvention of the requirements provided for in Article 4, including acting as a substitute for the CFD provider.

CHAPTER III
Entry into force of the measures

Article 6. Entry into force and application.
This resolution shall enter into force, once published in the "Boletín Oficial del Estado", the day following the expiration of the intervention measures established in the ESMA Decisions on binary options and contracts for difference, respectively. Therefore, Chapter I of this resolution, regarding binary options, shall enter into force on 2 July 2019 and Chapter II, regarding contracts for difference, shall enter into force on 1 August 2019.

With the aim of providing continuity in Spain to the decisions adopted by ESMA on binary options and CFDs, the measures contained in this resolution will continue to apply in the Spanish jurisdiction unless the CNMV observes changes in market conditions that allow for their repeal.

Madrid, 27 June 2019.–The President of the National Securities Market Commission, Sebastián Albella Amigo.

ANNEX I
Initial guarantee percentages in CFDs by type of underlying (a) 3.33% of the notional value of the CFD when the underlying currency exchange is composed of two of the following currencies: United States dollar, euro, Japanese yen, British pound, Canadian dollar, or Swiss franc.
(b) 5% of the notional value of the CFD when the underlying index, currency exchange, or commodity is:
(i) any of the following stock indices: Financial Times Stock Exchange 100 (FTSE 100); Cotation Assistée en Continu 40 (CAC 40); Deutsche Bourse AG 30 stock index (DAX30); Dow Jones Industrial Average (DJIA); Standard & Poors 500 (S&P 500); NASDAQ Composite index (NASDAQ), NASDAQ 100 index (NASDAQ 100); Nikkei index (Nikkei 225); Standard & Poors/Australian Securities Exchange 200 (ASX 200); EURO STOXX 50 index (EURO STOXX 50); (ii) a currency exchange composed of at least one currency not listed in point a) mentioned above; or (iii) gold; (c) 10% of the notional value of the CFD when the underlying commodity or stock index is a commodity or any stock index other than those listed in point b) above; (d) 50% of the notional value of the CFD when the underlying instrument is a cryptocurrency; or (e) 20% of the notional value of the CFD when the underlying instrument is:
(i) A stock; or
(ii) any other underlying not listed in this annex.

ANNEX II
Warnings on the risks of CFDs
Section A. Conditions of the risk warning

1. The risk warning must be given in a format that guarantees its importance, in a font size that is at least equal to the predominant size and in the same language used in the communication or published information.
2. If the communication or published information is on a durable medium or a website, the risk warning must be given in the format specified in Section B.
3. If the published communication or information is in a medium other than a durable medium or a website, the risk warning must be given in the format specified in Section C.
4. Notwithstanding paragraphs 2 and 3, if the number of characters in the risk warning in the format specified in Section B or C exceeds the character limit allowed in the standard terms of a third-party marketing services provider, the risk warning may be in the format specified in Section D.
5. If the risk warning in the format specified in Section D is used, the communication or published information must also include a direct link to the CFD provider's website containing the risk warning in the format specified in Section B.
6. The risk warning must include an updated loss percentage specific to the provider, based on an estimate of the percentage of CFD trading accounts provided to retail clients by the CFD provider that incurred losses. The estimate must be carried out every three months and cover a period of 12 months prior to the date on which it was made (the "12-month estimation period"). For the purposes of the estimate:
   a. A CFD trading account of a particular retail client will be considered to have lost money if the sum of all net realized and unrealized profits on the CFDs associated with the account...