FSMA Regulation establishes a framework for the distribution of OTC Derivatives (Binary options, CFDs...)

Press release

The distribution of certain financial derivatives among Belgian retail clients will be restricted as from 18 August 2016. Certain derivatives such as binary options, CFDs with leverage, etc. may not be distributed, and certain distribution practices will also be prohibited. The Regulation drawn up by the Financial Services and Markets Authority (FSMA) on this matter has been approved by royal decree.

The Royal Decree of 21 July 2016 is published with today's date in the Belgisch Staatsblad/Moniteur belge (Belgian Official Gazette). The Royal Decree approves the FSMA's Regulation on the distribution of OTC derivatives. The Regulation applies to derivative contracts distributed to consumers in Belgium, usually from abroad, via electronic trading platforms.

According to the providers, these are products that can generate high yields at a time of historically low interest rates. In reality, however, these are products that are marketed aggressively and are extremely risky, often involving transactions over a very short period and without any connection to the real economy.

The Regulation consists of two elements which apply cumulatively. The first element is a ban on distribution of a few specific types of derivative contracts to consumers via electronic trading platforms. These are:

  • binary options: a binary option is a contract in which one party undertakes to pay the other party a specified amount if the value of a given asset (listed share, currency, commodity, index, precious metal, etc.) changes in a specified direction within a predetermined - sometimes very short - period (a few seconds or minutes);
  • derivative contracts whose maturity is less than one hour;
  • derivative contracts with leverage, such as contracts for difference (CFDs) and rolling spot forex contracts. A CFD is a contract between a buyer and a seller in which the parties agree to exchange the difference between the current price of an underlying asset (listed share, currency, commodity, index, precious metal, etc.) and the price of that asset at the end of the contract. A rolling spot forex contract is a type of contract for a foreign exchange transaction which is renewed indefinitely until one of the parties closes its position; at that point, the transaction is settled in cash on the basis of the changes in the underlying currency since the beginning of the contract.

The Regulation applies to unlisted, or 'over-the-counter' (OTC) derivatives. It does not apply to derivatives that are admitted to trading on a regulated market or on a multilateral trading facility. The Regulation supplements the distribution ban that was already in force for certain products, such as life settlements (traded life policies) and financial products with a virtual currency as their underlying.

The second element is a ban on a number of aggressive or inappropriate distribution techniques (cold calling via external call centres, inappropriate forms of remuneration, fictitious gifts or bonuses, etc.) used when distributing OTC derivatives to consumers.

The Minister for Employment, the Economy and Consumer Affairs, Kris Peeters, noted: ‘This Regulation contributes to better protection of consumers of financial products. Henceforth, it will be clear to everyone that binary options and other speculative derivatives have no place on the Belgian retail market.’

The Minister of Finance, Johan Van Overtveldt, remarked: ‘In recent years, we have seen a rise in the number of foreign offerors of products such as binary options that approach the Belgian market without having an authorization and /or a published prospectus. This Regulation will help combat such offers.’

Jean-Paul Servais, chairman of the FSMA, stated: ‘The FSMA has repeatedly issued warnings about the risks associated with these products. Other supervisory authorities and ESMA have done likewise. Yet the FSMA continues to receive complaints about these products. Therefore it proposed establishing a framework regulating the distribution of OTC derivatives and to prohibit the distribution of certain types of these products.