Hence, the CNMV has resorted to introducing a series of measures such as (i) prohibiting the advertising of CFDs to retailers or the general public, sponsorship of events and organisations, brand advertising and the use of public figures; (ii) limiting the maximum leverage to which retailers can be exposed in futures and options; and (iii) obliging the provider to close out positions when the position falls below 50% of the initial margin, which limits losses.

Background

CFDs are complex derivative products in which an investor and an entity agree to exchange the difference between the buying and selling prices of an underlying asset. It is precisely because of this complex and high-risk inherent nature that CFDs are generally not suitable for retail investors. It is well worth recalling that both the European Securities Markets Authority (ESMA) -in 2018- and the CNMV -in 2019- adopted a number of intervention measures setting conditions on the marketing, distribution or sale to such investors.

While their functioning and specifics remain complex, they have become the investment derivative product of choice for small investors in Spain over the last few years. In practice, though, between 70% and 90% of investors who invested in CFDs suffered losses. All this occurred despite the stepping up of the CNMV's supervisory efforts, which led to the cessation of retail business in Spain of 12 foreign entities that provided CFD-related services without a physical presence and the shutdown of two entities with an establishment or agent in Spain.

In view of the fact that those measures introduced back in 2019 have not yielded the desired results, the CNMV has now decided to raise the level of the curbs along the lines of what is already being done in jurisdictions such as France or Belgium.

Scope

The measures introduced by the CNMV’s Resolution apply to entities authorised to provide investment services in Spain, regardless of the place of origin of the investment firm and whether it has a branch in Spain (hence including entities acting under the freedom to provide services), but do not bind Spanish entities when acting in other States.

Acknowledging the high risk involved, however, if the underlying instrument happens to be a crypto-asset that is not considered a financial instrument within the meaning of MiFID, these measures also apply to firms authorised in Spain when providing services in other EU Member States.

Key measures on CFDs

The key measures introduced by the CNMV can be summarised as follows:

1. Prohibition of advertising communications addressed to retail investors or to the general public

   • The marketing, distribution or sale of CFDs by means of marketing communications which are addressed to retail investors in Spain, including potential clients, is prohibited.

   • Communications of an advertising nature are in any case considered to be prohibited if they (i) redirect to a website offering CFDs; (ii) direct to a contact form, the download of an application, or any other type of tool intended to put the client in contact with an investment service provider offering CFDs and related services; and (iii) present offers to the general public of training, technical seminars, courses and workshops when these offers are related to CFDs and related services.

Excluded from the scope of the CNMV's Resolution are, inter alia, (i) the provision of information in response to a request at the sole initiative of the client, in relation to CFDs; or (ii) the information content required for the trading of CFDs, or for the execution of a transaction in such products, such as pre-contractual and contractual information.

2. Prohibition of event and organisation sponsorship and brand advertising

Any sponsorship of events or organisations and brand advertising, including the use of persons of public relevance, is prohibited when its purpose or effect is the -direct or indirect- advertising of CFDs.

3. Prohibition of certain commercial practices

Specific trading practices on CFDs are prohibited, including remuneration:

• • to clients bringing in new retail clients; and
  • to the own or third-party commercial network engaged in fund-raising and marketing that is determined (directly or indirectly, in whole or in part) on the basis of the number of clients attracted, the cash receipts of clients, the revenues of the entity providing the investment service, or the losses of clients and in general, any form of remuneration that conflicts with the interests of clients.

Other leveraged instruments

The CNMV Resolution sets out specific intervention measures on the marketing, sale and distribution to retailers of other leveraged instruments -such as futures and options- whose maximum risk is not known at the time of subscription or whose risk of loss is greater than the amount of the initial financial contribution.

These specific measures limit the maximum leverage to which retail investors investing in these products can be exposed and oblige the provider to provide them with so-called “margin call protection”, already foreseen for CFDs and involving the closing of positions when the client's position falls below 50% of the initial margin, thus limiting their losses.

Co-operation with other European supervisors

The CNMV will monitor compliance with these measures by the entities under its supervision. Likewise, since a large part of the activity in Spain is being conducted by entities acting under the freedom to provide services, it will request the co-operation of other European supervisors to advise these entities of their obligation to comply with these measures.