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
