IG, Plus500 Plunge as EU Watchdog Signals Derivatives Crackdown

Updated on
  • CFD brokers plunge after ESMA scrutinizes marketing, sales
  • Analyst says ESMA took harder line than U.K.’s FCA last year

Shares of stock derivative brokers including IG Group Holdings Plc, Plus500 Ltd. and CMC Markets Plc sank 14 percent or more in London after European regulators laid out harsher-than-expected potential rules on some speculative financial products.

The companies operate some of the largest platforms for retail investors to trade contracts for difference, which are derivatives that allow investors to speculate on the price of stocks, currencies, and commodities without owning them. The European Securities and Markets Authority, using powers set out in the overhaul of financial rules known as MiFID II, outlined late Friday how it may curb leverage, limit how much clients can lose on the contracts and ban the sale of binary options.

Read more: Why contracts for difference are under scrutiny

“ESMA has been concerned about the provision of speculative products such as CFDs, including rolling spot forex, and binary options to retail clients for a considerable period of time and has conducted ongoing monitoring and supervisory convergence work in this area,” the agency said. 

Many investors were expecting ESMA’s action to be in line with a move made by the U.K.’s Financial Conduct Authority in 2016, said Numis Securities Ltd.’s Jonathan Goslin. The agency proposed capping leverage, the amount of borrowed funds investors could use, at 50 to 1 with a 25 to 1 for traders with less than 12 months experience. But ESMA took a harder line, Goslin said: “It’s pan-Europe,” said the analyst, who recommends investors sell CMC shares.

The authority also said it was weighing whether to "restrict the marketing, distribution or sale to retail clients of CFDs." Regulators have criticized CFD advertising for being too aggressive and aimed at retail investors who don’t understand the products’ complexity.

Brokerages such as Plus500 market their offerings to retail investors through sponsorship deals with professional soccer clubs such as Atletico Madrid and Liverpool. Real Madrid forward Cristiano Ronaldo, who has a partnership with Exness Ltd. in London, touts the brokerage to his 66 million Twitter followers.

Read how contracts for difference allow speculation on the price of cryptocurrencies

IG Group, based in London, said that more than half of its U.K. and EU clients may be “professional” investors not impacted by the rules. It also said the proposals on limiting leverage are “disproportionate,” and estimated that the measures would have cut revenue by less than 10 percent. CMC Markets said it can’t quantify the impact, while Israel-based Plus500 said it will wait for the consultation to conclude in January.

The leverage limits “will be a concern, especially when some instruments from some providers offer 250:1 to 500:1 leverage,” Portia Patel, an analyst at Liberum Capital Ltd. wrote in a note.

ESMA’s actions may also cloud the picture for one of the fastest growing businesses for CFDs -- cryptocurrencies. London-based brokerages such as Plus500 and eToro Ltd. offer investors the ability to go long or short bitcoin and other digital coins, and advertise for customers on the London subway and YouTube.

On Nov. 14, the FCA issued a statement warning investors that derivatives linked to cryptocurrencies are "extremely high-risk, speculative products” and urged them to protect themselves from scams.

Read more about Ronaldo’s partnership with a CFD provider

Rainer Lenz, chairman of Finance Watch, a Brussels-based public interest organization, said ESMA’s action on CFDs shows how MiFID is empowering the agency to scrutinize products it deems unsafe for retail investors.

"Before, ESMA had to issue a guideline and convince national authorities to use their power to intervene, and that was a pity," said Lenz, who sits on an advisory panel to the regulator. "Now ESMA’s product intervention power is getting more direct.”

IG Group tumbled as much as 14 percent and was down 9 percent to 670 pence as of 10:47 a.m. in London trading. CMC Markets and Plus500 plunged as much as 19 percent.

— With assistance by Silla Brush

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