IOSCO Proposes Additional Policies to Protect Retail Investors of OTC Leveraged Products

IOSCO issued a Consultation Report containing policy approaches to enhance protections for retail investors purchasing OTC leveraged products, including rolling-spot forex contracts, contracts for differences ("CFDs") and binary options. The Consultation Report is one in a series of reports intended to provide resources for members to improve firm practices, combat detrimental activities in the markets, and provide better education on the features and risks of particular products.

According to the Consultation Report, OTC leveraged products are susceptible to distribution risks, risks related to particular product features (such as high levels of leverage offered by firms distributing CFDs and rolling-spot forex contacts, and lack of price transparency in binary options), risks arising from potential conflicts in market intermediaries' business models and execution practices, and risks arising from unlicensed firms offering products illegally. While particular regulatory frameworks may differ across jurisdictions, firms offering retail OTC leveraged products are generally subject to rules requiring clear and accurate disclosures and information to be provided to clients, know-your-customer procedures, the appropriate assessment of suitability for any advice given to clients, the execution of client orders on the best terms available, organizational arrangements mitigating conflicts of interest and ensuring the fair treatment of all clients, and the safeguarding of client assets.

IOSCO shared the following potential policy measures for firms to consider, noting that they could be used to facilitate investor protection and adequate regulation of firms:

• A requirement for firms offering retail OTC leveraged products to be registered with the relevant regulatory authority;

• A requirement for firms that are subject to leverage limits or that incorporate minimum margin requirements for retail investors;

• A requirement for firms to limit retail clients' losses in CFDs or rolling-spot forex contracts to their deposited funds or their funds invested for each trade;

• A requirement for firms to provide standardized disclosures setting out total costs and charges of the product;

• A requirement for firms to disclose to clients the percentage of client accounts that made a net profit or loss during a certain period of trading activity;

• A requirement for firms to adopt a fair-pricing methodology and use externally verifiable price sources;

• A requirement for firms to provide enhanced disclosures to their clients about how orders are executed;

• A restriction on certain forms of marketing or sales techniques used by firms offering relevant products to retail investors; and

• A prohibition or restriction on the sale of relevant products by market intermediaries, or a requirement that transactions in such products take place on exchanges.

IOSCO stated that no regulatory measure is mandated by the Consultation Report, and that members should consider the measures based on the specific risks presented to retail investors in their jurisdictions.