Wednesday January 20 2016

News Source: Global Exchanges

Focus: Trading Rules

Type: General




The Financial Services and Markets Authority (FSMA) has published a draft regulation governing the distribution of certain derivative financial instruments to retail clients.

The FSMA has observed that certain types of particularly risky derivative financial instruments are distributed to retail clients in Belgium through electronic trading platforms generally located abroad. The instruments concerned are the following:

  • Binary options: these are contracts under which each party undertakes to pay the other a specific amount if the price of a given asset (listed share, currency, commodity, index, precious metal, etc.) changes in the manner predicted after a lapse of time that may be very short (mere seconds or minutes);
  • Rolling spot forex transactions: these are spot transactions in currencies whereby the contract is renewed indefinitely until one of the parties closes its position. The transaction is then settled in cash based on the change in the underlying currency since the time the contract was entered into;
  • Contracts for difference (CFD): a CFD is an agreement between a buyer and a seller under which the parties exchange the difference between the current price of an underlying asset (listed share, currency, commodity, index, precious metal, etc.) and its price when the contract is closed.

The FSMA intends to adopt a regulation providing a framework for the distribution of such instruments. This initiative is based on the following grounds:

  • The instruments mentioned above are particularly risky and even arbitrary, and have generally nothing in common with a real investment or financial transaction. Generally they are hardly if at all based on economic fundamentals and are therefore most often purely speculative. Thus they definitely do not aim to enable the investor to make an investment in the traditional sense of the word.
  • These instruments are – despite their extremely high-risk nature – most often presented by their promoters as making it possible to obtain high yields at a time of historically low interest rates. However, studies in this area have shown that in reality these instruments usually result in losses for the subscribers.
  • The distribution techniques used by the providers concerned are often aggressive and inappropriate, given the characteristics of this type of instrument and the risks associated with them.
  • In conclusion, these instruments are not suited to being distributed to retail clients.

The draft regulation is made up of two elements which will apply cumulatively.

The first element is aimed at banning the distribution of certain OTC derivative financial instruments to retail investors. This applies to instruments whose maturity is under 14 days, currency derivatives (rolling spot forex and contracts for difference on currencies), derivative instruments that comprise a significant leverage ratio greater than and derivatives on non-mainstream assets (with the exception of gold).

The second element identifies certain aggressive or inappropriate distribution techniques (the use of call centres for cold calling, inadequate modes of remuneration, fictitious gifts or bonuses, etc.) that were found to be used on the market. The draft regulation prohibits the use of such practices for the distribution of OTC derivative financial instruments to retail investors.

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