Spreadbetting firms saw their shares come under pressure on Monday after the European Union's securities watchdog proposed curbs on core parts of their markets, with the UK regulator expected to follow suit.
ESMA are suggesting prohibiting the sale and marketing of binary options and restricting the sale and marketing of contracts for difference (CFDs).
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Furthermore, the European regulator is suggesting limiting leverage to between 30:1 and 5:1 depending on volatility, and they also suggest a margin close-out rule, protection against negative balances, restrictions on inducement to trade and a standardised risk warning.
The UK’s Financial Conduct Authority said it supported ESMA in its consideration of potential EU-wide product intervention.
In a note to clients, analysts at Numis Securities commented: “A combination of a brief consultation in January and suggesting that they are considering using their intervention powers under article 40 of MiFIR mean that we believe that this is effectively a done deal and the FCA also seems to be endorsing the proposals.”
They added: “While we lack detail the proposals appear more stringent than the previous FCA suggested remedies. This, combined with the likely pan-European impact, mean that our forecasts will almost certainly fall once the detail is known."
The Numis analysts downgraded their rating for IG to ‘hold’ from ‘add’ although they noted that the firm is “by far the best placed to absorb the impact which we expect to be fatal for a number of their competitors.”
They reiterated a ‘sell’ rating on CMC shares.
Spreadbetting shares plunge
In statements reacting to the ESMA news, IG Group said it had stopped offering its Sprint binary product to new retail clients in January, with revenue from binaries traded by clients in the UK and EU accounting for less than 5% of its revenue in the first half.
IG Group said it remains difficult to predict the impact of regulatory change beyond the current financial year.
Meanwhile, CMC Markets said it could quickly respond to regulatory change as it did in Germany and Britain.
And Plus500 said it has never offered binary options, adding that it provides protection to its customers across all its products.