ESMA Warns Perpetual Futures Within Scope of CFD Regulations

The European Securities and Markets Authority (ESMA) has issued a statement warning firms offering perpetual futures that their obligations regarding investor protection are in scope of the product.

In the statement ESMA says it, and the National Competent Authorities (NCAs) in the EU, have noted the increased offering of derivatives, often marketed as perpetual futures or perpetual contracts, that provide leveraged exposure to underlying values, including crypto-assets such as bitcoin or ethereum. “These financial instruments are likely to fall within the scope of the existing national product intervention measures on CFDs,” ESMA states, meaning that they are subject to investor protection measures such as limits on leverage, negative balance protection, and close-out rules.

“The commercial name provided by firms (e.g. “perpetual futures”) is irrelevant for the categorisation under MiFID II of products distributed, marketed or offered to clients, and firms must conduct a careful legal analysis of these products and their functioning, in order to check whether they may fall within the scope of application of product intervention measures,” ESMA further says in the statement. “Firms must conduct this careful legal analysis by adhering at all times to the overarching obligation to act honestly, fairly and professionally in accordance with the best interests of clients, to which they are bound.”

This means a careful assessment of the target market for the products, a designed approach when marketing – “mass marketing campaigns, initiatives aimed at inexperienced investors, or emails and pop-ups to all clients of a firm that state that such products are now offered and investors should “get started now” should not be considered to be consistent with a narrow target market” – and ensuring there are no conflicts of interest.