The European Securities and Markets Authority (ESMA) has taken two decisions under Article 40 of the Markets in Financial Instruments Regulation.

These decisions are to restrict the marketing, distribution or sale of contracts for differences and
binary options to retail clients.

A ‘contract for differences’ or ‘CFD’ is 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 asset or other thing, irrespective of whether it is traded on a trading venue, and that may be settled in cash or at the option of one of the parties other than by reason of default or other termination event.

The marketing, distribution or sale to HNW retail clients of these derivatives is restricted to circumstances in which the product provider requires the retail client to pay the initial margin protection; and he/it provides the retail client with the margin close-out protection (i.e. the closure of one or more of a retail client’s open CFDs on terms most favourable to the client); and he/it provides the retail client with the negative balance protection (i.e. the limit of the retail client’s aggregate liability for all CFDs connected to a CFD trading account with a CFD provider to the funds in that CFD trading account); and he/it does not provide the retail client with a payment in relation to the marketing, distribution or sale of a CFD, other than the realised profits on any CFD that he/it provides; and he/it does not send a communication to or publish information accessible by a retail client relating to the marketing, distribution or sale of a CFD unless it includes a specified risk warning.

The risk warning rules are complex. In one incidence the product provider is obliged to write: "Between 74-89% of retail investor accounts lose money when trading CFDs."

There is also a temporary prohibition against retail customers being allowed to use binary options. Indeed, the marketing, distribution or sale of such options to retail clients is banned.

A binary option is a derivative that may be settled in cash at the option of one of the parties other than by reason of default or other termination event;
that only provides for payment at its close-out or expiry; and whose its payment is limited to: (i) a predetermined fixed amount or zero if the underlying of the derivative meets (or fails to meet) one or more predetermined conditions. It is, in essence, a bet.

The decision about contracts for differences applies from 1st August onwards for a period of three months and the decision about binary options applies from 2nd July onwards, also for a period of three months.