Resolution no. 20976

Restrictions on the marketing, distribution and sale, in Italy or from Italy, of Contracts for Difference to retail customers pursuant to Article 42 of Regulation (EU) No 600 of 15 May 2014

LA COMMISSIONE NAZIONALE PER LE SOCIETÀ E LA BORSA

HAVING REGARD to Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (hereinafter referred to as MIFIR), and in particular Article 42;

HAVING REGARD to Commission Delegated Regulation (EU) No 2017/567 of 18 May 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council as regards definitions, transparency, portfolio compression and supervisory measures relating to product and position intervention, and in particular Article 21;

HAVING REGARD to the Italian Legislative Decree of February 24, 1998, n. 58, and subsequent amendments, containing the Consolidated Law on the provisions on financial intermediation (hereinafter, the Consolidated Law on Finance) and in particular Article 7-bis;

AFTER CONSULTATION with the Bank of Italy, pursuant to Article 7-bis, paragraph 6, of the Consolidated Law on Finance, and having taken note of the assessments it has made;

CONSIDERED the following:

1. Introduction

Over the last few years there has been an increasing offer of contracts for difference (CFDs) to retail investors in Italy, mainly from EU intermediaries, particularly under the freedom to provide services. These products are inherently risky, complex and speculative and can result in losses for the investor that exceed the entire capital invested.

It has been noted that the offer of CFDs to retail investors is increasingly characterised by aggressive selling techniques and a lack of transparent information, which does not allow retail investors to understand the risks of the products in question.

In February 2017, Consob published an investor protection notice specifically highlighting the fact that CFDs - and other similar products - are, as expressly recognised by ESMA, inherently very risky and complex products and, as such, they are not considered suitable for the majority of retail clients.

Nevertheless, there has been a steady increase in the number of complaints from retail investors who have reported to have suffered significant money losses in relation to trading under CFDs. Consob therefore believes that there are significant concerns for investor protection.

Similar concerns have led the European Securities and Markets Authority (hereinafter also referred to as ESMA) to adopt, pursuant to Article 40 of the MIFIR with the cooperation of Consob and other competent national authorities, on 22 May 2018[1] for three months with effect from 1 August 2018, an intervention measure aimed at limiting the offer of CFDs to retail investors in the Union. ESMA, having assessed the persistence of a significant concern for investor protection, renewed this measure three times[2]. These renewals by ESMA have also been based on the results of investigations conducted by ESMA in cooperation with the competent national authorities in order to assess the impact of said measure. These investigations showed that, at European level, the number of retail client accounts, trading volume and total capital invested by retail clients had been reduced as a result of the implementation of ESMA's restrictions.

Similar evidence has emerged from the analysis carried out by Consob according to data provided to it by the competent national authorities of the country of origin of the most active EU companies in Italy, including, in particular, Cypriot and English companies. In this regard, there was a reduction in CFD transactions by Italian retail customers of the companies in question in terms of volumes traded, number of transactions and the amount of losses and profits made.

Given that ESMA's intervention measures are of a temporary nature (maximum three months) and are not renewable indefinitely, it is concluded that if ESMA does not renew its measure adopted on 22 May 2018, CFDs could be offered again (in Italy) to retail customers without the application of appropriate measures to protect them from the risks associated with the products in question, and that, therefore, there would still be significant concerns for the protection of retail investors arising from CFD transactions, Consob considers it necessary, through the adoption of its own intervention measure pursuant to art. 42 of the MIFIR, to permanently restrict the marketing, distribution and sale - in Italy or from Italy - of these products to retail investors.

2. Scope of application of Consob measures

This resolution concerns CFDs, which are derivative contracts with cash settlement, the purpose of which is to give the holder a positive or negative exposure to changes in the price, level or value of an underlying asset. CFDs include, among other things, rolling spot forex products and financial bets on spread bets. This resolution does not apply to futures, swaps and forward-rate futures. Likewise, this resolution does not apply to warrants and turbo certificates.

The possible presence of the securitisation and the negotiability on a trading venue do not change the key characteristics of a CFD. If such products are issued, they fall within the scope of this resolution.

3. The existence of a significant investor protection concern (Article 42(2)(a) of the MIFIR)

The condition set out in Article 42(2)(a) of the MIFIR is the existence, inter alia, of a significant fear regarding investor protection. In order to determine the existence of such a concern, Consob has assessed the relevance of the criteria and factors referred to in Article 21(2) of Commission Delegated Regulation (EU) No 2017/567. After taking into account the relevant criteria and factors, Consob concluded that such a significant concern exists for the following reasons.

3.1 The degree of complexity and transparency of CFDs

CFDs are complex products[3], typically not traded on a trading venue. The pricing, trading terms and settlement of these products are not standardised, making it difficult for retail clients to understand the terms of the product. In addition, CFD-providing intermediaries often ask clients to expressly accept that the reference prices used to determine the value of the CFD may differ from the price available on the market where the underlying asset is traded; these clauses make it difficult for retail clients to assess and verify the accuracy of the prices received from the provider.

The cost and fee structures applicable to CFD trading are complex and lack transparency for retail clients. In particular, retail clients typically find it difficult to understand and assess the expected return on a CFD, due in part to the complexity of the relative impact of transaction fees on the CFD. Transaction fees for CFDs are normally applied to the full notional value of the transaction; as a result, investors incur higher fees than invested funds as the level of leverage increases. Transaction fees are usually deducted from the initial margin deposited by the client; therefore, in a situation of high leverage, when opening a CFD position, the client may incur a significant loss in their trading account caused by the application of high fees. Since higher leveraged transaction charges erode the client's initial margin to a greater extent, the client must make a higher profit from the transaction in order to make a profit. This reduces the possibility that the client may make a profit after these expenses and increases the risk of loss.

In addition to transaction fees, spreads and various other financial costs and charges including commissions (a general fee or commission for each trade, or for opening and closing a CFD account) and/or account management fees may also apply. In addition, financing fees are often charged for the mere maintenance of a CFD, such as daily or overnight charges (i.e. for maintaining an open position overnight) to which a surcharge may be applied. The number and complexity of the various costs and charges and their impact on the performance of trading clients reduce the transparency of CFDs and thus the ability of retail clients to make an informed investment decision.

Another source of complexity is the use of stop-loss orders. This characteristic of the product may give retail clients the wrong impression that a stop-loss order guarantees execution at the price they have set (the stop-loss level). However, the stop-loss orders do not guarantee a level of security but the activation of a "market order" when the price of the CFDs reaches the price set by the client. Consequently, the price received by the client (execution price) may differ from the price at which the stop-loss was set[4]. Although stop-losses are not exclusive to CFDs, the leverage of these instruments increases the sensitivity of the investor's margin to changes in the price of the underlying, increasing the risk of sudden losses, and means that traditional controls on trades, such as stop-losses, are insufficient to address concerns about investor protection.

Another relevant complexity associated with CFDs may be caused by the relevant underlying market. For example, with forex trading, clients speculate on the evolution of exchange rates between two currencies. If neither currency is the one used by the client to open a CFD position, the client's gain will depend on the measures taken by the client to evaluate the changes between the three currencies. As a result, a high level of knowledge of all the currencies involved is required to successfully navigate the complexities of this type of currency trading; retail clients usually do not have an adequate level of knowledge of these complexities.

CFDs with crypto-currencies as an underlying raise other significant concerns. Crypto-currencies are a relatively immature asset class with high risks for investors. Regulators, including ESMA, have issued numerous warnings about the risks associated with investing in crypto-currencies; many of these concerns also apply to crypto-currency CFDs. In fact, retail clients generally do not understand the risks associated with speculation on an extremely volatile and relatively immature asset class, risks accentuated by investing with margin, which requires a very rapid reaction from clients.

The high level of complexity, lack of transparency, the nature of the risks and the type of underlying therefore confirm the existence of significant concerns regarding investor protection with respect to CFDs.

3.2 The particular features or components of CFDs

The main feature of CFDs is their ability to use leverage. In general, although leverage can increase the possible profit for clients, it can also increase the possible losses. For retail clients, the application of leverage may increase the probability of a larger loss more than the probability of a larger gain for the following reasons.

Leverage affects the return on an investment by increasing the impact of transaction fees incurred by retail clients.

Another risk related to trading in leveraged products relates to the interaction between high leverage and the practice of automatic closing when the margin is reached. Under commonly applicable contractual terms, CFD provider intermediaries may at their discretion close a client's account once the client's net assets reach a specific percentage of the initial margin that the client is required to pay to open one or more CFD positions.

The interaction between high leverage and automatic closing when a margin is reached increases the likelihood that the client's position will automatically be closed by the CFD provider in a short period of time, unless the client pays an additional margin in the hope of reversing a disadvantaged position. High leverage increases the possibility that the client's margin is insufficient to allow them to keep their CFD positions open as it makes them sensitive to small price changes in the underlying to the detriment of the same client.

In market practice, automatic closing when margin is reached appears to have been introduced by CFD providers mainly to allow them to more easily manage client exposures and credit risk by closing the client's position before the client's funds become insufficient to cover their current exposure. Automatic closing when a margin is reached also provides a certain degree of protection to customers as it reduces, but does not eliminate, the risk that the customer (particularly at high levels of leverage) loses the entire initial margin or even a higher amount.

A further leverage effect is that it exposes clients to the risk of incurring losses in excess of the sums invested. This is a fundamental risk that retail clients may not understand despite written warnings. A client's margin is established as collateral to support the client's position. If, for example, the price of the underlying varies to the detriment of the client's position in excess of the initial margin established, the client may incur losses in excess of the amount of funds in his CFD trading account even after all the other client's open CFD positions have closed.

Trading at high levels of leverage also increases the impact of gapping during periods of high market volatility (such as the sudden collapse of the pound sterling and the abandonment of the fixed exchange rate of the Swiss franc against the euro). Gapping means a sudden movement in the price of the underlying. Gapping does not only concern CFDs, but the risks associated with this event are exacerbated by the presence of high leverage. If gapping occurs, the loss-making client may not be able to close a CFD position at the desired price; this may result in significant losses for the client when trading at high levels of leverage.

The frequent high levels of leverage offered to retail clients, the volatility of some underlying assets and the application of transaction fees that affect the return on investment can quickly change a client's investment position. Consequently, the client must act promptly to manage their risk exposure by inserting an additional margin to avoid the automatic closing of the position. In such cases, high leverage can very quickly cause significant losses for retail clients and increase the risk that these losses will exceed the amounts spent on CFDs.

The above factors confirm that there are significant concerns about investor protection with respect to CFDs.

3.3 The size of potential negative consequences and the degree of disparity between the expected return or profit for investors and the risk of loss

The number of active clients subscribing to CFDs is highly variable, due to the relatively short useful life of client accounts in these products and the cross-border nature of the activities. Based on data collected from several national competent authorities, ESMA has estimated that the number of trading accounts of retail clients with EEA-based CFDs and binary options providers, at around 1.5 million in 2015, increased to around 2.2 million in 2017[5].

The offer of CFDs to retail clients in Italy comes mainly from investment firms and banks authorised in other EU countries that operate cross-border (especially under the freedom to provide services) and only on a residual basis from companies and banks under Italian law.

Over the last few years, Consob has received many complaints from retail clients regarding their CFD transactions with EU intermediaries operating in Italy on a cross-border basis, in particular under the freedom to provide services. The number of complaints concerning the products in question amounted to 349 between 2015 and 2016, 95 in 2017 and 89 in 2018. In general, customers complain that they have suffered significant losses of money. A review carried out in 2016 by Consob of an EU intermediary with a branch in Italy showed that, in the 2014-2015 period, 78% of the Italian retail clients of this intermediary suffered losses from their investments in CFDs; likewise, 75% of the clients who invested in rolling spot forex in the same period suffered losses (recording an average loss of 2,800.00 euro). There was also a positive correlation between the number of trades made by retail clients and the amount of losses incurred. A subsequent survey carried out by Consob in March 2017 on five Italian branches of investment firms authorised in other Member States active in CFDs showed that, in 2016, the number of retail clients who realised losses was 83%, with an average loss per client of approximately 7,000.00 euro. The persistence of loss levels for CFD retail clients indicates a structural feature of the return profile that contrasts with positive historical returns on investments in other long-term financial products.

Since the adoption of its measures, ESMA has received reports from national competent authorities showing an overall reduction in the number of CFD retail client accounts, trading volume and client net worth over the three months August to October 2018 compared to the same period in 2017[6]. The share of profitable retail accounts, which decreased slightly in August 2018 compared to 2017, remained broadly stable. The competent national authorities also reported that the average costs incurred by clients for trading CFDs, which appear to be less dependent on market conditions than the overall results of clients, were significantly lower in the 2018 quarter than in the corresponding 2017 quarter. Average costs for active retail accounts containing crypto-currency CFDs decreased disproportionately compared to other accounts, although these accounts continued to incur higher costs than accounts not exposed to crypto-currency. Finally, the competent national authorities reported a steady reduction in the number of automatic position closures, the number of times accounts recorded negative equity and the amount of negative equity.

After the adoption of ESMA’s measures, Consob has noted a decrease in the number of complaints from retail clients, which, as indicated above, fell from 349 in 2015/2016 to 89 in 2018, 40 of which were received after the adoption of the aforementioned measures; from the beginning of 2019 to 16 April, 26 complaints were received. Similarly, by comparing the data on the CFD operations of retail clients of the most active firms in Italy for the periods August to October 2017 and August to October 2018, Consob observed a reduction not only in the volumes traded (approximately -68%) and in the number of transactions (approximately -40%), but also and above all in the amount of losses (approximately -46%).

Since the adoption of the ESMA (EU) Decision 2018/796, no evidence has emerged that contradicts the previous findings regarding a significant concern regarding investor protection.

3.4 The type of clients involved

CFDs are marketed, distributed or sold to both retail and professional clients. However, retail clients (unlike professional investors) generally do not have the experience, knowledge and expertise to make investment decisions that take due account of the risks posed by CFDs.

Given the proven and persistent losses suffered by retail clients, it is clear that there is a significant concern about investor protection in relation to the unrestricted marketing, distribution or sale of CFDs to retail clients.

3.5 Marketing and distribution activities relating to CFDs

Despite their complexity, CFDs are offered to retail clients, for the most part, through electronic trading platforms that are not accompanied by investment advice or portfolio management services. In such circumstances, an assessment of appropriateness is required in accordance with Article 25(3) of the MiFID II. However, this assessment does not prevent CFD-providing intermediaries or their clients or potential clients from executing the transaction, subject to simple notice to the client. This allows retail clients to have access to products, such as CFDs, which, due to their features, should not be distributed to them.

Aggressive trading patterns and misleading commercial communications practices by some intermediaries providing CFDs have also been observed. The fact that the average life of a client's account is often relatively short means that CFD-providing intermediaries need to maintain a continuous flow of new clients, which in turn may lead to the adoption of aggressive marketing and sales techniques that do not serve the interests of retail clients.

A common feature of the marketing and sales techniques adopted by the CFD industry is the provision of trading benefits (monetary and non-monetary), such as bonuses to attract and encourage retail customers to invest in CFDs, the provision of gifts (e.g. holidays, machines, electronics), trading courses or cost reductions (e.g. spreads or commissions).

Bonuses and other trading benefits can distract the investor from the high risk of the product. They are typically aimed at attracting retail customers and encouraging trading. Retail clients may consider these promotions to be a central feature of the product so that the level of risk associated with the product is not adequately assessed.

In addition, in order to benefit from these trading benefits associated with opening CFD trading accounts, clients are often required to pay funds to the provider intermediary and to carry out a number of trades within a specified time frame. As evidence shows that most retail clients suffer losses as a result of CFD trading, this often means that clients suffer greater and more frequent monetary losses from trading than they would have incurred in the absence of a bonus offer.

The content of the complaints received by Consob from Italian CFD clients has shown that the terms and conditions applied to promotional offers are often misleading and that many clients have stated that they are not aware of the conditions for access to the benefits/bonuses offered. Several clients complained that they had difficulty withdrawing funds once they had agreed to use these bonuses offered by the intermediary.

The distribution models observed in this market sector involve specific conflicts of interest, the likelihood of which has been increased by the need, in particular, to attract new customers on an ongoing basis. Conflicts of interest arise, or may arise, from the fact that some CFD-providing intermediaries act as counterparties to their clients' trades without covering their exposure; this puts their interest in direct opposition to that of their clients. This increases the risk and incentive for these intermediaries to manipulate or use less transparent reference prices, or to adopt other unfair practices such as the cancellation of profitable trading under false pretexts. There is also a risk that providers may try to exploit asymmetric slippage (e.g. transfer any losses resulting from the price slippage to the client, while retaining any profits generated by the same phenomenon to themselves). The same traders may intentionally delay the time elapsing between quotes and the execution of CFD trades in order to further exploit this practice.

The marketing and distribution practices associated with CFDs described above confirm that there is a serious concern for investor protection with respect to CFDs.

4. Applicable existing regulatory requirements under Union law are not suitable to address the significant investor protection concern identified (Article 42(2)(b) of the MIFIR).

As provided for in Article 42(2)(b) of the MIFIR, Consob has assessed whether the regulatory requirements applicable under Union law to the relevant financial instrument or activity are appropriate to address the threat. Consob has found that the applicable regulatory requirements in force are those contained in MiFID II and Regulation (EU) No 1286/2014 (PRIIPs)^[7]. In particular, they include: (i) the requirement to provide customers with adequate information as referred to in Article 24(3) and (4) MiFID II; (ii) the suitability or appropriateness requirements as referred to in Article 25(2) and (3) MiFID II; (iii) the best execution requirements as referred to in Article 27 MiFID II; (iv) the product governance requirements set out in Articles 16(3) and 24(2) MiFID II and (v) the reporting requirements set out in Articles 5 to 14 of the PRIIPs Regulation.

In this respect, it is noted that the scope and content of several applicable regulatory requirements under MiFID II and the MiFIR Regulation are similar to those already laid down in Directive 2004/39/EC (MiFID I). Although the adoption of MiFID II and the MiFID Regulation aims at improving several relevant aspects of investment services and activities in order to strengthen investor protection (including through product intervention powers), the improvements of several relevant provisions do not address the specific concerns described in this Decision.

The obligations to provide appropriate information to clients have been specified in more detail in Directive 2014/65/EU, which has significantly strengthened the disclosure requirements for costs and charges by requiring investment firms to provide aggregated information on all costs and charges related to investment services and financial instruments. However, the disclosure-based rules alone - including improved information on costs - are clearly insufficient to address the complex risk arising from the marketing, distribution or sale of CFDs to retail clients.

In particular, Article 24(3) of the MiFID II Directive provides, inter alia, that all information, including marketing communications, addressed by investment firms to clients or potential clients should be fair, clear and not misleading. Article 24(4) of the MiFID II Directive also requires clients or potential clients to be provided in a timely manner with appropriate information about the investment firm and its services, the financial instruments and strategies proposed, the execution venues and all related costs and charges, including, in particular, guidelines and warnings on the risks associated with investments in those financial instruments, and whether the financial instruments are intended for retail or professional clients.

The PRIIPs Regulation sets out uniform rules on the format and content of the key information document to be provided by manufacturers of retail investment products and packaged insurance products ('PRIIPs') to retail investors to enable them to understand and compare the characteristics and key risks of PRIIPs. In particular, Article 5 of the PRIIPs Regulation, as further implemented by Commission Delegated Regulation (EU) 2017/653, sets out, inter alia, the methodology for presenting the summary risk indicator and related explanations, including whether the retail investor may lose all the capital invested or may incur additional financial commitments. However, this type of communication does not sufficiently draw the attention of retail clients to the specific consequences of investing in CFDs. For example, the performance ratio only refers to the individual CFD product and therefore does not provide the client with the overall percentage of retail clients' accounts that suffer monetary losses when trading CFDs. Furthermore, the synthetic risk indicator does not include direct information on past product performance and this information may not be provided in the accompanying narrative explanations, as the PRIIPS manufacturer has some discretion on the extent to which certain explanations should be provided. The risk warnings introduced by this decision would provide retail customers with important information, in particular on the percentage of retail accounts that suffer monetary losses from CFD trading with each specific firm.

The requirements on suitability have also been strengthened in Directive 2014/65/EU, which redefines the suitability assessment and requires the delivery of a suitability report to the client. In particular, under Article 25(2) of Directive 2014/65/EU, providers of CFDs are required to obtain the necessary information regarding the knowledge or experience of the client or potential client in the investment field relevant, inter alia, to the specific type of product, the financial situation of the client or potential client, including their ability to bear losses, and their investment objectives, including their risk tolerance, so that such CFD providers are able to recommend investment services and financial instruments that are suitable for them and are appropriate in relation to their risk tolerance and their ability to bear losses. However, the suitability requirements are only applicable to the provision of investment advice and portfolio management and are therefore normally not relevant in relation to CFD trading, which takes place mainly on electronic platforms, without the provision of investment advice or portfolio management services.

Moreover, the adequacy assessment objectives (i.e. examination of the products in relation to the experience, knowledge, financial situation and investment objectives of the clients) have remained substantially unchanged with respect to the regime set out in Directive 2004/39/EC (MIFID I) and, as highlighted in this resolution, have not been adequate enough to avoid damage to investors.

Similarly, the appropriateness assessment has been strengthened by MiFID II mainly through restricting the list of non-complex products, which has led to a reduction in the scope of products for execution-only services. Article 25(3) of MiFID II stipulates that intermediaries providing CFDs must ask the customer or potential customer to provide information about their investment knowledge and experience regarding, inter alia, the specific type of product or service proposed or requested, in order to allow the provider to determine whether the product is appropriate for the customer or potential client. If the intermediary considers that the product is not appropriate for the customer or potential customer, it shall warn them of this situation. CFDs are to be classified as complex financial products and therefore subject to the appropriateness test set out in Article 25(3) of the MiFID II.

However, such a review was already under MiFID I which provided for essentially the same appropriateness review as MiFID II. As highlighted in this resolution and as shown by supervisory experience, the appropriateness check was not deemed sufficient to address concerns about the protection of investors operating in CFDs. Therefore, it is unlikely that the suitability and appropriateness tests carried out under the current legislation will be sufficient to ensure that the way retail clients trade in CFDs is such as to address significant investor protection concerns.

In terms of best execution, most of the execution rules were already in place under MiFID I and have been strengthened by MiFID II. In particular, Article 27 of MiFID II requires investment firms to take "all sufficient steps" (and no longer "all reasonable steps") to obtain the best possible result for their clients when executing orders. In addition, investment firms must disclose the first five execution venues where they have executed client orders and the results achieved in the execution of client orders. Best execution rules do not in themselves address the risks inherent in product features other than execution, nor those associated with the wide marketing, distribution or sale of CFDs to retail clients.

In respect of these substantially similar existing regulatory requirements, ESMA has repeatedly noted the risks described above in the Questions and Answers (Q&As) and the opinion on “MiFID practices for firms selling complex products”. Consob believes that, despite the use of non-binding instruments to ensure a consistent and effective application of the applicable existing regulatory requirements, the investor protection concern persists. This highlights that, for the reasons set out in this section, these requirements do not address the concerns identified.

The product governance rules set out in Articles 16(3) and 24(2) of MiFID II require that providers manufacturing financial instruments (therefore including CFDs) to be offered for sale to customers must ensure that such products are designed to meet the needs of an identified target market of final clients identified within the relevant category of clients; that the distribution strategy of the products is compatible with the target; that providers take reasonable steps to ensure that the financial product is distributed within the identified target market and that they regularly review the identification of the target market of the products they offer and their performance. Intermediaries shall understand the financial instruments offered or recommended, assess their compatibility with the needs of the clients to whom they provide investment services, also taking into account the reference market of final clients, and ensure that financial instruments are offered or recommended only when this is in the interest of the client. In addition, intermediaries wishing to distribute a financial instrument not manufactured by them must have adequate mechanisms to obtain and understand relevant information relating to the product approval process, including the identified target market and the product features. Intermediaries distributing financial instruments manufactured by providers not subject to the product governance requirements under MiFID II or by third country providers should also have adequate mechanisms in place to obtain sufficient information on the financial instruments in question.

Although the product governance requirements of MiFID II may restrict the type of clientele (the target market) for which CFDs would be appropriate and to which they should therefore be distributed, they do not address the main risks described above in relation to product characteristics (e.g. high leverage) or associated practices (e.g. the possibility of imposing additional payment obligations or offering bonuses).

Furthermore, these requirements do not specifically restrict the mass-market distribution of products with the above features. On the contrary, the harm suffered by customers shows that the marketing, distribution or sale of CFDs is not appropriate for the mass retail market unless it is accompanied by certain restrictions which are not set out in detail in the product governance requirements.

Despite the existence of the above regulatory requirements, the factual evidence shows that retail clients have suffered monetary losses when trading CFDs in the absence of specific limitations. Therefore, this measure is necessary to address the threat.

5. Consob’s measure addresses the significant investor protection concern identified (Article 42(2)(a) of the MIFIR).

In light of the size and nature of the significant concern identified with regard to investor protection, Consob considers it necessary and proportionate to permanently restrict the marketing, distribution or sale in Italy or from Italy of CFDs to retail clients where certain conditions are met.

These measures adequately address the identified significant concern about investor protection by ensuring an appropriate and uniform level of minimum protection for retail clients trading in CFDs.

The main benefits related to these measures and restrictions are as follows:

i. reducing the risk of miss-selling CFDs and their related financial consequences. This is an important benefit for retail clients and the financial markets as a whole;

ii. restoring investor confidence in the financial markets, including with regard to intermediaries active in this sector who may have suffered reputational damage as a result of problems encountered by investors.

Consob believes that the possible financial consequences and costs that providers will face when implementing the intervention measures set out in this resolution have already emerged as a result of the implementation of the temporary restrictive measures adopted by ESMA on CFDs.

5.1 Protection by initial margin

Consob considers it necessary to restrict the marketing, distribution and sale of CFDs in Italy or from Italy to retail customers by applying certain limits of leverage depending on the nature of the underlying.

The introduction of such leverage limits will protect clients by requiring them to pay a minimum initial margin in order to open a position in a CFD. This requirement is called "initial margin protection". This initial margin will limit the client’s notional investment exposure in relation to the amount invested. As the costs faced by a client increase in terms of notional investment exposure, initial margin protection will reduce the likelihood of clients incurring losses compared to the expected odds of trading at a higher leverage ratio.

The imposition of a minimum initial margin is appropriate to address some of the distribution risks related to CFDs by ensuring that only retail clients who are able to pay a sufficiently high margin can trade in these products.

In the same vein, initial margin protection is expected to reduce the likelihood that CFD-providing intermediaries will target mass retail clients through smaller accounts with a higher leverage ratio. The proposed initial margin protection will help to ensure that intermediaries act in the best interests of their clients rather than seeking to attract new clients or expand their market share through higher levels of leverage.

Initial margin protection will also help to address the risk of potential conflicts of interest, in particular where intermediaries do not hedge their clients' CFD trading and therefore directly benefit from their clients' losses, reducing the risk of firms profiting from clients' loss-making trading and from the profits expected from trading.

5.2 Automatic closing protection when margin is reached

Another measure to protect retail clients is the margin close-out protection. This measure complements the introduction of initial margin protection and mitigates the risk for retail clients to lose significant amounts, greater than those they would have invested in a CFD under normal market circumstances.

The introduction of automatic closure when the margin is reached and the harmonisation of the percentage at which CFD providers are required to close the client's open CFD (at 50% of the initial margin required) are also designed to address the uneven application of automatic closure practices when the margin is reached by CFD providers.

In this regard, also in the light of the analyses carried out by ESMA, it is considered that a standardised rule of automatic closure when the margin is reached on the basis of the account, set at 50% of the protection by the total initial margin, as a single measure to be adopted together with the other measures described in this resolution, constitutes the most proportional minimum protection. In particular, this rule should provide for the closure of one or more CFDs on terms most favourable to the retail client, to ensure that the value of his account does not fall below 50% of the total initial margin protection paid to enter at any time into all currently open CFDs. The value of the account for this purpose should be determined by the funds in that account together with any unrealised net gains on open CFDs linked to that account.

The automatic closing protection when the margin is reached does not prevent an intermediary from applying a closing criterion based on the position at 50% of the initial margin required by the specific position rather than a closing criterion based on the account; in fact, such a choice can reduce complexity for retail clients. In addition, by applying a 50% position closure criterion, the provider inherently complies with the account closure requirement since all individual positions will be closed in accordance with the 50% closure criterion.

The introduction of automatic closing at 50% of the initial required margin mitigates the risk of substantial loss by retail clients and is proportionate.

5.3 Negative balance protection

Negative balance protection aims at protecting retail clients in exceptional circumstances where there is a sufficiently large and sudden change in the price of the underlying asset to prevent the CFD provider from closing the position as required by the margin close-out protection, thus leading to a negative balance in the client's account. In other words, important market events can cause gapping by nullifying the effectiveness of the auto-closing protection when margin is reached.

The purpose of negative balance protection is to ensure that an investor's maximum losses from CFD trading, including all related costs, are limited to the total of the CFD trading funds in the investor's CFD trading account. This should include any sums still to be paid into that account as net profits from the closing of open CFDs linked to the account in question. An investor should not be subject to any additional liabilities associated with trading in CFDs. Other accounts should not be part of the investor's capital at risk. In the event that a trading account also includes other financial instruments (e.g. UCITS or shares), only funds dedicated to CFD trading will be at risk, not funds dedicated to other financial instruments.

The purpose of negative balance protection is also to provide a support mechanism in the event of extreme market conditions. In fact, a major risk of severe damage arising without negative balance protection is the possibility that an investor may be in debt to a company due to extreme market conditions. This situation is particularly disadvantageous for investors without substantial liquid assets. Therefore, in line with ESMA's measures, it is considered appropriate to adopt negative balance protection for CFD trading accounts as a way to address this possible source of significant harm with minimal costs for firms and investors.

Given the effects on intermediaries offering CFDs of the provision of negative balance protection as well as the substantial damage that retail clients could suffer in the absence of such protection, it is considered that, overall, the negative balance protection based on the account is in line with the identified investor protection concerns and proportionate.

5.4 Risk warnings

Another measure to address the risks for retail clients in relation to CFDs is to require firms to provide standardised and firm-specific risk warnings, including information on the percentage of losses recorded on the accounts of their retail clients. Consob considers it necessary to improve the quality of risk warnings so that the client understands the highly risky and complex nature of the products. In particular, it is important that the possibility of rapid losses that may exceed the capital invested is clearly explained to the client.

These specific risk warnings are intended to provide retail clients with essential information about CFDs, in particular about the percentage of retail accounts opened with the firm that suffer losses from trading in these products.

The requirement for CFD-providing intermediaries to disclose the percentage of retail clients that are loss-making is intended to compensate for the intermediaries' own tendency to highlight potential profits more than losses.

In addition, these warnings should help retail clients make an informed decision about whether to invest in a high-risk product that is more likely to produce a loss than a gain.

Each provider intermediary should therefore inform their clients of the percentage of their CFD trading accounts held by retail clients who lost money during the last 12-month period. To ensure that the figure is constantly updated, this calculation should be recalculated on a quarterly basis. The percentage reported should be presented in a simple and clear manner within a risk warning in each communication from the provider intermediary.

Both realised and unrealised gains and losses should be taken into account in determining whether an account is loss making. Realised gains and losses are those relating to CFD positions that have been closed during the calculation period. Unrealised gains and losses are those relating to the value of open positions at the end of the calculation period. In order to have a complete representation of the percentage of accounts that have recorded a profit or loss, the calculation must include all costs related to CFD trading.

CFD-supplying intermediaries who have recently entered into this activity and for those who have not opened a position in the last 12 months, it is not possible to calculate this percentage in respect of this period. Such intermediaries shall provide a standardised risk warning citing the percentages set out in Annex 2 to this Resolution.

Consob considers it appropriate to allow the risk warning to be adapted to the type of communication channel used by means of an abbreviated risk warning for communications via a short-term medium such as applications for mobile devices or posts on social media.

In order to overcome possible technical difficulties in the use of the shortened risk warning for communications other than those made through a durable medium or a web page due to the character limits imposed by third party suppliers, Consob allows a risk warning with a reduced number of characters which is not intended to replace the shortened risk warning.

The use of the reduced character warning is only envisaged in cases where third parties have used an intermediary who imposes a character limit to market CFDs that is not compatible with the number of characters included in the risk warnings.

Risk warnings with a reduced number of characters provide retail clients with information on the percentage of retail CFD accounts that incur monetary losses. However, in order to draw clients' attention to the fact that they may bear the significant risk of losing money by investing in CFDs, it is necessary that any communication containing a risk warning with a reduced number of characters should also include a direct link to the web page of the CFD provider intermediary where the warning required for durable media or web pages is visible.

5.5 The prohibition of monetary and non-monetary benefits

A further measure to address the risks related to the distribution of CFDs to retail clients is the prohibition of monetary benefits (e.g. so-called "trading bonuses") and of certain types of non-monetary benefits. Promotions offering bonuses or other incentives to invest in CFDs often distract retail clients from the highly risky nature of these products, attracting those who may not choose to do so in the absence of such incentives. The proposed benefits are often conditional upon clients making deposits to the account or executing a certain volume of transactions.

However, this prohibition does not apply to information and research tools provided to retail clients and related to CFDs as these tools support clients' decision-making.

6. Consob's measures and restrictions are proportionate in relation to the nature of the risks identified, the level of sophistication of the investors or market participants concerned and its likely impact on investors and market participants who may hold, use or benefit from CFDs (Article 42(2)(c) of the MIFIR).

Despite the product governance requirements and additional regulatory requirements mentioned above, damage associated with the marketing, distribution or sale of CFDs to retail customers has increased in recent years.

In light of the size and nature of the significant concern identified with regard to investor protection, Consob considers it necessary and proportionate to impose permanent restrictions on the marketing, distribution or sale in Italy or from Italy of CFDs to retail clients where certain conditions are met.

Such measures and restrictions are necessary and proportionate to address the significant concerns identified regarding investor protection. In general, they are considered to reduce the anomalous and significant losses incurred by retail clients on CFDs while at the same time increasing retail clients' awareness of the risks associated with such products. The benefits of addressing investor protection concerns in the identified ways outweigh the potential consequences for CFD-providing intermediaries, including the possible reduction in revenues for the intermediaries themselves (due to lower trading volumes, lower overall transaction costs paid by clients and lower losses by clients).

In addition, Consob's measures and limitations shall apply from the day following that on which the similar ESMA temporary measures in this area cease to be effective. This allows the beneficial effects of ESMA's measures in terms of retail investor protection to continue seamlessly and without additional implementation costs for intermediaries.

7. Consob’s measures and restrictions have no discriminatory effect on services or activities provided from another Member State (Article 42(2)(e) of the MIFIR).

The measures set out in this resolution apply to CFD supplier intermediaries with registered offices in Italy and to supplier intermediaries with registered office in another Member State. Investment firms with a registered office in another Member State offering investment services in Italy fall within the scope of the measures covered by this resolution, as do those with a registered office in Italy. The measures are therefore not considered to have a discriminatory effect on services or activities provided from another Member State as they apply to the marketing, distribution or sale of CFDs regardless of the Member State from which those services or activities are provided.

8. Consultations and communications (Article 42(2)(d) (f) and (3) of the MIFIR)

Pursuant to Article 42 para. 2, lett. d) of the MIFIR, Consob has consulted the competent national authorities of the other EU Member States, as they are potentially affected by the measures covered by this resolution. No objections were received from these authorities.

Pursuant to Article 42, para 2, lett. f) of the MIFIR, Consob has also consulted the Ministry of Agriculture, Food, Forestry and Tourism, which has not raised objections to the measures covered by this resolution.

Pursuant to Article 42, paragraph 3, of the MIFIR, Consob has notified ESMA and the competent national authorities of the other EU Member States. ESMA issued its opinion, pursuant to Article 43, para 2 of the MIFIR, considering that the measures covered by this resolution were justified and proportionate; the opinion has been published on the ESMA’s website.

HEREBY RESOLVES AS FOLLOWS:

Article 1

Definitions

For the purposes of this Decision, the following definitions shall apply

(a) 'contract for difference' or 'CFD' means a derivative other than an option, a futures, a swap or forward rate agreement, the purpose of which is to give the holder a long or short exposure to changes in the price, level or value of an underlying asset, whether or not trading takes place on a trading venue, and that must be settled in cash or may be settled in cash at the discretion of one of the parties (other than by reason of default or other event leading to termination of the contract);

(b) "excluded non-monetary benefits" means any non-monetary benefits other than information and research tools relating to CFDs;

(c) "Initial margin" means any payment made for the purpose of entering into a CFD, excluding commissions, transaction fees and any other related costs;

(d) 'initial margin protection' means the initial margin as defined in Annex I;

(e) 'margin close-out protection' means the closure of one or more of a retail client’s open CFDs on terms that are most favourable to the client within the meaning of Articles 24 and 27 of Directive 2014/65/EU when the sum of the funds in the CFD trading account and the unrealised net profits of all open CFDs linked to that account falls to less than half of the total initial margin protection for all such open CFDs;

(f) 'negative balance protection' means the limit of a retail client's aggregate liabilities for all CFDs linked to a CFD trading account with an intermediary providing such instruments, relating to the funds in that CFD trading account.

Article 2

Restriction of CFDs in respect of retail clients

The marketing, distribution or sale of CFDs in Italy or from Italy to retail customers is restricted by the fulfilment of all of the following conditions:

(a) the CFD-providing intermediary requires the retail client to pay the initial margin protection;

(b) the CFD-providing intermediary provides the retail client with the margin close-out protection;

(c) the CFD-providing intermediary provides the retail client with the negative balance protection;

(d) the CFD-providing intermediary does not correspond to the retail client directly or indirectly with a payment monetary or excluded non-monetary benefit in connection with the marketing, distribution or sale of a CFD, with the exception of the realised profits on any of the CFDs provided;

(e) the CFD-providing intermediary does not send directly or indirectly a communication to a retail client, or publishes information accessible to that client regarding the marketing, distribution or sale in Italy or from Italy of a CFD unless such communication or information includes the appropriate risk warning specified by Annex II and complying with the conditions contained therein.

Article 3

Prohibition of participation in circumvention activities

The participation, knowingly and intentionally, in activities the object or effect of which is to circumvent the requirements set out in Article 2 shall be prohibited, including by acting as a substitute for the CFD-providing intermediary.

Article 4

Entry into force and application

This decision shall be published on CONSOB's website. It enters into force on the day following that of its publication in the Official Journal[8] and shall apply from 1 August 2019 until revocation, if the conditions set out in Article 42, paragraph 6, of the MIFIR are met.

June 20, 2019

THE CHAIRMAN
Paolo Savona

ANNEX I

Percentages of initial margin by underlying type

(a) 3.33 % of the notional value of the CFD where the underlying currency pair is composed of any two of the following currencies: US dollar, Euro, Japanese yen, Pound sterling, Canadian dollar or Swiss franc;

(b) 5 % of the notional value of the CFD when the underlying index, currency pair or commodity is:

(i) any of the following stock indices: Financial Times Stock Exchange 100 (FTSE 100); Cotation Assistée en Continu 40 (CAC 40); Deutsche Bourse AG German Stock Index 30 (DAX30); Dow Jones Industrial Average (DJIA); Standard & Poors 500 (S&P 500); NASDAQ Composite Index (NASDAQ), NASDAQ 100 Index (NASDAQ 100); Nikkei Index (Nikkei 225); Standard & Poors / Australian Securities Exchange 200 (ASX 200); EURO STOXX 50 Index (EURO STOXX 50);

(ii) a currency pair consisting of at least one currency not listed under (a) above; or

(iii) Gold;

(c) 10 % of the notional value of the CFD when the underlying commodity or equity index is a commodity or any equity index other than those listed in point (b) above;

(d) 50 % of the notional value of the CFD where the underlying is a cryptocurrency; or

(e) 20 % of the notional value of the CFD when the underlying is:

(i) a share; or

(ii) not otherwise listed in this Annex.

ANNEX II

Risk warnings

SECTION A

Conditions for risk warnings

1. The risk warnings shall be in a layout ensuring their visibility, in a font size at least as large as the predominant font size and in the same language as that used in the communication or published information.

2. Where the communication or published information is in a durable medium or on a web page, the risk warnings shall be presented in the format specified in Section B.

3. Where the communication or information is provided on a medium other than a durable medium or webpage, the risk warnings shall be provided in the format specified in Section C.

4. By way of derogation from paragraphs 2 and 3, if the number of characters contained in the risk warning in the format specified in Section B and Section C exceeds the character limit permitted under the standard conditions of a third party provider, the risk warning may be in the format specified in Section D.

5. If the risk warning in the format specified in Section D is used, the communication or published information shall also include a direct link to the CFD provider's webpage containing the risk warning in the format specified in Section B.

6. The risk warnings should include an up-to-date provider-specific loss percentage figure based on a calculation of the percentage of CFD trading accounts provided to retail clients by the CFD provider that lost money. The calculation must be made every three months and cover the 12-months preceding the date on which it is performed ('12-month calculation period'). For the purposes of the calculation:

a. an individual retail client CFD trading account is considered a loss-making account if the sum of all realised and unrealised net profits on CFDs linked to the CFD trading account during the 12-month calculation period is negative;

b. any costs relating to CFDs linked to the CFD trading account must be included in the calculation, including all charges, expenses, fees and commissions;

c. the following items are excluded from the calculation:

i. any CFD trading account that does not have an open CFD associated with it during the calculation period;

ii. any profits or losses from products other than CFDs linked to the CFD trading account;

iii. any deposits or withdrawals of funds from the CFD trading account;

7. Notwithstanding paragraphs 2 to 6, if in the last 12- month calculation period a CFD provider has not provided an open CFD linked to a retail client's CFD trading account, that CFD provider shall use the standard risk warnings in the format specified in Sections E to G, as appropriate.

SECTION B:

Specific provider risk warning on durable medium and webpages

SECTION C

Abbreviated provider-specific risk warning

SECTION D

Warning of specific risks of a provider with a reduced number of characters

SECTION E

Standard risk warning for durable media and webpages

SECTION F

Abbreviated standard risk warning

SECTION G

Standard risk warning with a reduced number of characters

Footnotes:

[1] ESMA (EU) Decision 2018/796 of 22 May 2018 of the European Securities and Markets Authority temporarily restricting contracts for differences within the European Union in accordance with Article 40 of Regulation (EU) No 600/2014 of the European Parliament and of the Council (OJ L 136, 1.6.2018, p. 50).

[2] See latest ESMA Decision (EU) 2019/679 of 17 June 2019.

[3] CFDs do not meet the criteria for qualification as non-complex financial instruments under Article 25(4) of MiFID Directive 2 in conjunction with Article 57 of Commission Delegated Regulation (EU) No 2017/565 of 25 April 2016 supplementing MiFID Directive 2 with regard to organisational requirements and operating conditions for investment firms and defined terms for the purposes of the said Directive (OJ L 87, 31.3.2017, p. 1).

[4] Also see Article 21, paragraph 2, letter d of Commission Delegated Regulation (EU) 2017/567 and, in particular, the penultimate sub-factor listed therein, i.e. the use, inter alia, of terminology which is misleading because it implies higher levels of safety than that which are actually possible or likely.

[5] See ESMA Decision (EU) 2018/796 paragraph 2.3.

[6] See ESMA Decision (EU) 2019/155 paragraph 6. .

[7] Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for retail investment and packaged insurance products, OJ L 352, 9.12.2014, p. 1.

[8] Published in the Official Journal of the Italian Republic no. 150 of June 28, 2019.