EU Markets Watchdog Toughens Rules on Crypto Derivatives
European Union: The European Securities and Markets Authority (ESMA), which stands as the market watchdog for the European Union has made move to toughen its position on crypto derivative contracts.
On Tuesday, the ESMA said in an announcement that it has decided to temporarily adjust the leverage limit for crypto-related “contracts for difference” (CFD) products to 2:1. This move will thus necessitate retail investors make an initial payment of nothing less than 50% of the total CFD value.
What a CFD does is that it makes one party agrees that it will pay the other party should in case the value of the underlying asset changes. This policy came after the ESMA began a public consultation process last January. At the time, the agency argued that the volatility of digital currencies as an underlying asset for CFDs can become a serious concern for the protection of retail investors.
The initial leverage limit for crypto-related CFD stood at 5:1, this means that a retail investor could pay only 20% of the total CFD value initially. The EU markets watchdog had considered either a lower leverage limit for crypto-related CFD – 2:1 or 1:1 – or even placing a ban on the marketing, distribution, or sales of the products altogether.
In an announcement made by ESMA today, the agency revealed that digital currencies remain a major area of concern, and in the near future, it may consider implementing a tougher measure for retail investor’s protection.
According to ESMA:
“Due to the specific characteristics of cryptocurrencies as an asset class the market for financial instruments providing exposure to cryptocurrencies, such as CFDs, will be closely monitored, and ESMA will assess whether stricter measures are required.”
This measure comes at a time when the crypto market is witnessing a rising interest of retail investors, dealers and brokers have responded to this growing interest with new crypto derivatives. For instance, yesterday, March 26, Dukascopy, the Swiss bank and securities dealer, made an announcement that it now offers Bitcoin/USD CFDs through its retail customer accounts, with future plans of offering purchase and sales of the underlying crypto assets.