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CMVM Regulation No. 5/2019 In force


 

CMVM Regulation No. 5/2019

Restricts the marketing, distribution and sale of contracts for differences and prohibits the marketing, distribution and sale of binary options in Portugal to retail investors 

(Courtesy translation. This document does not replace the original version published in the Official Gazette)


This regulation implements ESMA Decisions 2018/1636 and 2018/2064 into Portuguese law, which respectively restrict the trading of contracts for differences (CFDs) and temporarily prohibits the marketing of binary options to retail investors throughout the territory of the European Union, which were renewed  on 21 September and the 14  December 2018, and 22 March 2019 for binary options and 23 October 2018 and 23 January and 17  April 2019 for CFDs. The risks associated with the distribution of these financial instruments to retail investors led ESMA to use its product intervention powers under article 40 of Regulation (EU) No. 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments for the first time.  
 
CFDs are complex financial instruments where price, trading conditions and settlement are not standardized, which in turn makes it difficult for retail investors to understand the terms and conditions of these financial instruments. In addition, many CFD distributors require clients to accept that the reference price used to determine the value of the CFD may not coincide with the underlying’s market price, which constrains the ability of the retail investor to verify whether the price proposed by the distributor for the CFD is fair.
 
The costs and charges associated with trading CFDs can also be complex and lack transparency, making it difficult for retail investors to understand them, particularly in their ability to assess the expected performance of a CFD, but also the impact that transaction rates will have in its performance, which may also add to spread costs, as well as other financing costs and commissions. 
 
Charging financing fees to maintain an open CFD, such as daily or nightly rates, is also common, to which a trade margin can still be added. Therefore, the complexity and variety of costs and charges associated with this financial instrument, as well as its impacts on the commercial performance of clients, make this financial instrument particularly difficult for retail investors to understand, thus affecting their ability to make an informed investment decision.
 
Binary options are complex financial instruments with a pricing structure that hinders the ability of retail investors to accurately measure the value of the option considering the likelihood that the event to which it refers will happen. Although retail investors can publicly use available search engines or tools to help them determine the price of the binary option, they face significant information asymmetry when compared to the information available to the binary option distributor. It should also be noted that European retail investors usually acquire these financial instruments in over-the-counter markets, which means that the price, performance and settlement of the instruments they buy are not standardized, making it difficult for retail investors to understand the characteristics of these financial instruments.
 
The price of binary options is set according to the probability of an event occurring, and the value of the benefits is determined in a manner similar to traditional fixed-odds bets (e.g. sports betting or election results). Trades are in most cases very short-term and the investor will either obtain a very high return or suffer a total loss of investment. It should be noted that some binary options have deadlines that expire after a few minutes or even a few seconds. These fundamental characteristics can also be found in gambling products, which are linked to compulsive behaviours and with detrimental results for consumers.
 
In addition to high risk, binary options have structural negative returns, which means that the more positions the investor acquires, the more likely he is to lose money.
In recent years, we have been witnessing a rapid growth in the trading, distribution or sale of binary options and CFDs to retails investors in the European Union, which, in view of the characteristics of these financial instruments, justify the use of the CMVM's powers of intervention similar to what other European regulators have already done. 
 
Thus, under the provisions of Article 361 (2) (i) and Article 369, all of the Securities Code, of Article 1 (2) (d), Article 12 (r), Article 15 (3) (a) of the CMVM Statutes, approved by Decree-Law No. 5/2015 of 8 January and Article 41 of the Framework Law of the Regulating Entities, approved by Law No. 67/2013 of 28 August,  Article 2 (1) (a) of Law No. 35/2018 of 20 July and Article 42 of Regulation (EU) No. 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments, the CMVM Management Board approves the following regulation: 

 

 
​Article 1
Purpose and definitions

 

1 - This Regulation restricts the marketing, distribution and sale of contracts for differences and prohibits the marketing, distribution and sale of binary options in Portugal to retail investors. 
 
2 – For the purposes of this regulation: 
​ 
      a) «contract for differences» or «CFD»  means a derivative other than an option, future, swap 
      or forward rate agreement, the purpose of which is to give the holder a long or short exposure 
      to fluctuations in the price, level or value of an underlying, irrespective of whether it is traded 
      on a trading venue, and that must be settled in cash or may be settled in cash at the option of one 
      of the parties other than by reason of default or other termination event; 

      b) «excluded non-monetary benefit» means any non-monetary benefit other than, insofar as 
      they relate to CFDs, information and research tools;

 
      c)  «initial margin» means any payment for the purpose of entering into a CFD, 
      excluding commission, transaction fees and any other related costs;

 
      d)  «initial margin protection» means the initial margin determined by Annex I; 
 
      e)  «margin close-out protection» means the closure of one or more of a retail client's open CFDs 
      on terms most favourable to the client in accordance with articles 294(7), 304(1) and (2), 305, 
      309-H, 309-I(1) and (2), 312(1)(a)(d)(e)(h) and (4)(8)(9) and (11), 313(1), 313-B(1) and 330 of the
     Securities Code when the sum of funds in the CFD trading account and the unrealised net profits 
     of all open CFDs connected to that account falls to less than half of the total initial margin protection
     for all those open CFDs;

 
     ​f)  «negative balance protection» means the limit of a retail client's aggregate liability for all CFDs
    connected to a CFD trading account with a CFD distributor to the funds in that CFD trading account.

​ 
3 – For the purposes of this regulation and irrespective of whether it is traded on a trading venue, 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 other 
       than by reason default or other termination event;

       b)  it only provides for payment at its close-out or expiry;

       c)  its 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.
 
 
 
Article 2
Restriction of the sale, distribution and sale of CFDs to retails investors
 
The marketing, distribution or sale of CFDs to retail investors is restricted to circumstances where at least all the following conditions are met:
 
         a) the CFD distributor requires the retail investor to pay the initial margin protection; 

         b) the CFD distributor provides the retail investor with the margin close-out protection;

         c) the CFD distributor provides the retail investor with the negative balance protection;

         d) the CFD distributor does not directly or indirectly provide the retail investor with a payment,
         monetary or excluded non-monetary benefit in relation to the marketing, distribution or sale of 
         a CFD, other than the realised profits on any CFD provided; and 

        
e) the CFD distributor does not send directly or indirectly a communication to or 
         publish information accessible by a retail investor relating to the marketing, distribution or sale 
         of a CFD unless it includes the appropriate risk warning specified by and complying with the 
         conditions in Annex II.
 
 
Article 3
Prohibition of marketing, distributing and sale of binary options to retail investors

1 - The marketing, distribution or sale to retail clients of binary options is prohibited. 
 
2 – The prohibition of the previous paragraph 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 payment made by the retail investor for the binary option, including any commission,
        transaction fees and other related costs;  
 
 
        b)  a binary option that meets the following conditions: 
 
             (i)   the term from issuance to maturity is at least 90 calendar days;  

           
(ii)  a prospectus made available to the public, drawn up and approved in accordance with
            Section V of Chapter I of Title III of the Securities Code and the regulations at European level
            directly applicable in the Portuguese legal system; and

            (iii)  the binary option does not expose the distributor to market risk throughout the term of the
            binary option and the distributor or any of its group entities do not make a profit or loss from 
            the binary option, other than previously disclosed commission, transaction fees or other related
            charges.

 
 
Article 4
Prohibition of participating in circumvention activities
 
It shall be prohibited to participate, knowingly and intentionally, in activities the object or effect of which is to circumvent the requirements in Articles 2 and 3, including by acting as a substitute for the binary option distributor.
 
 
Article 5
Entry into force
 
1- This Regulation shall enter into force on 3 July 2019.
 
2 - Without prejudice to the provisions of the preceding paragraph, article 2 of this Regulation shall enter into force on 1 August 2019.

 
 
7 May 2019 - The Chair of the Management Board, Gabriela Figueiredo Dias – The Vice-Chair of the Management Board, Filomena Oliveira