Battling with the uncertainties of CFDs and Cryptocurrency in 2018

28 March 2018

 

In the new age of virtual currency trading, reports indicate that the global value of the cryptocurrency market surpasses $600 billion. Although the markets have seen a spiral momentum, the large businesses continue to thrive, leaving the midsize/small investment brokerage firms under struggle with the harsh impositions that are continually enacted by Cyprus Securities and Exchange Commission (“Cysec”) and The European Securities and Markets Authority (ESMA).

 

The below information evaluates and explores the current restrictions that Cyprus Investment Firms (“CIFs”) are currently facing regarding Contracts for Differences (“CFDs”) and CFDs relating to Virtual Currencies.

 

 

CFDs relating to Virtual Currencies (Cryptocurrency)

 

Circular C244 issued by Cysec dated 13th October 2017 gave specific guidelines for all CIFs desiring to proceed with offering Cryptocurrency. Cysec gave particular emphasis to the fact that CFDs relating to Virtual Currencies are not governed by any specific EU regulatory framework.

 

Due to the lack of regulation surrounding these types of products, certain impositions were released by Cysec in order to ensure the safeguarding of clients and investors of CIFs, namely the following:

 

  1. CIFs must warn all clients/investors before providing any services to clients in virtual currencies and/or CFDs relating to virtual currencies in relation to these products the following information:
  1. All risks must be properly recorded.
  2. Virtual currency exchangers and liquidity providers that provide the feeds to the CIFs must be fully regulated and must undergo due diligence by the CIF prior to signing any contracts. Checks of the said feed providers must be done periodically.
  3. CIFs must clearly disclose to the public the methodology used to calculate the bid and ask prices of such products.
  4. CIFs should use more than one feed provider and should cross-check with other feed providers in order to ensure that best execution principles are followed. Where only a single feed provider is used, CIFs must be able to determine and record how their best execution obligations are held.
  5. For all retail clients the leverage limit should be set 5:1 for trading on CFDs relating to virtual currencies.
  1. Passporting of these products in the European is not permitted without the approval from the relevant applicable country prior to offering CFDs on virtual currencies to any country.
  2. The CIFs turnover of income derived form CFDs on virtual currencies  should not exceed 15% of the total turnover of the CIF per quarter.

ESMA

On the 27th March 2018, ESMA issued a press release regarding the proposed restriction of CFDs (ESMA71-98-128 ), specifically affirming that a restriction on the marketing, distribution or sale of CFDs to retail investors shall be imposed. This restriction consists of: leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and a firm specific risk warning delivered in a standardised way.

The product intervention measures ESMA has agreed under Article 40 of the Markets in Financial Instruments Regulation include:

30:1 for major currency pairs.

20:1 for non-major currency pairs, gold and major indices.

10:1 for commodities other than gold and non-major equity indices.

5:1 for individual equities and other reference values.

2:1 for cryptocurrencies.

 

Going forward

Due to the ever-changing regulatory status of CFDs and CFDS on virtual currencies, CIFs are now undergoing vast changes to their business models in order to facilitate the uncertainty of 2018. The large transitions that CIFs will undergo due to the fluctuating regulatory pressure, and specifically, in accordance with The Markets in Financial Instruments Directive II (“MIFID II”), has caused for the exploration of new strategies and the consideration of diversification outside of Europe to help sustain their businesses.

 

For more information feel free to contact us at astefani@playbell.com

 

Andrea Stefani

Partner

Head of Financial Services and Capital Markets

 

 

 

The above is for information purposes only and does not constitute advice.