BELGIUM: FSMA Regulation Establishes a Framework for the Distribution of OTC Derivatives

Wednesday August 10 2016

The distribution of certain financial derivatives among Belgian retail clients will be restricted as from 18 August 2016. Certain derivatives such as binary options, CFDs with leverage, etc. may not be distributed, and certain distribution practices will also be prohibited. The Regulation drawn up by the Financial Services and Markets Authority (FSMA) on this matter has been approved by royal decree.

The Royal Decree of 21 July 2016 was published in the Belgisch Staatsblad/Moniteur belge (Belgian Official Gazette) on 08 August 2016. The Royal Decree approves the FSMA`s Regulation on the distribution of OTC derivatives. The Regulation applies to derivative contracts distributed to consumers in Belgium, usually from abroad, via electronic trading platforms.

According to the providers, these are products that can generate high yields at a time of historically low interest rates. In reality, however, these are products that are marketed aggressively and are extremely risky, often involving transactions over a very short period and without any connection to the real economy.

The Regulation consists of two elements which apply cumulatively. The first element is a ban on the distribution of a few specific types of derivative contracts to consumers via electronic trading platforms. These are:

• binary options: a binary option is a contract in which one party undertakes to pay the other party a specified amount if the value of a given asset e.g. listed share, currency, commodity, index, precious metal, etc. changes in a specified direction within a predetermined – sometimes very short – period (a few seconds or minutes);
• derivative contracts whose maturity is less than one hour;
• derivative contracts with leverage, such as contracts for difference (CFDs) and rolling spot forex contracts. A CFD is a contract between a buyer and a seller in which the parties agree to exchange the difference between the current price of an underlying asset and the price of that asset at the end of the contract.

The Regulation applies to unlisted, or `over-the-counter` (OTC) derivatives. It does not apply to derivatives that are admitted to trading on a regulated market or on a multilateral trading facility. The Regulation supplements the distribution ban that was already in force for certain products, such as life settlements (traded life policies) and financial products with a virtual currency as their underlying.

The second element is a ban on a number of aggressive or inappropriate distribution techniques (cold calling via external call centres, inappropriate forms of remuneration, fictitious gifts or bonuses, etc.) used when distributing OTC derivatives to consumers.

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