To protect retail investors, the Bank of Lithuania will prohibit offering binary options to them as of 2 September and limit trade in contracts for differences (CFDs).
These derivatives are inherently complex and often residents choose them without even understanding in what they are investing. As of now, we will employ measures allowing us to ensure that such instruments are not accessible to retail investors or that their risk is minimised,’ said Vytautas Valvonis, Director of the Supervision Service at the Bank of Lithuania.
The recast Markets in Financial Instruments Directive (MiFID2) and its implementing Regulation (EU) No 600/2014 of the European Parliament and of the Council provides such an opportunity by enabling supervisory authorities of the European Union (EU) to prohibit or restrict products and services that result in losses to retail investors.
In view of the risks, the Bank of Lithuania decided to prohibit marketing, offering and selling binary options to retail investors and to begin applying restrictions to CFDs. To this end, a leverage limit is imposed for CFDs, each individual account is subject to the close out of positions due to a lower margin rule, as well as protection against negative balances. A restriction on the incentives offered to trade CFDs and the obligation to deliver a standardised risk warning are also provided for.
These measures have been undertaken as the above-named products are complex, risky, lack transparency, and quite many problems ensue over their offering, trade and distribution. Research carried out by EU institutions shows that most retail investors trading in CFDs (74-89%) lose their money, with average losses per account ranging from €1,600 to €29,000.
The current legislation concerning the EU and Lithuania’s financial markets is not sufficient to protect retail investors against the risks entailed in trading binary options and CFDs. The intervention measures adopted by the Bank of Lithuania will protect these investors in our country and contribute to development of common practice across the EU as other EU countries intend to apply equivalent measures as well.