The International Organization of Securities Commissions (IOSCO) issued a consultation report proposing policy measures for its members to consider when addressing the risks arising from the offer and sale of OTC leveraged products to retail clients.
The Report on Retail OTC Leveraged Products identifies various regulatory approaches aimed at enhancing the protection of retail investors who are offered OTC leveraged products, often on a cross-border basis. The report covers the offer and sale by intermediaries of rolling-spot forex contracts, contracts for differences (CFDs), and binary options. Intermediaries market and sell these products to retail investors in most IOSCO member jurisdictions.
Retail investors use OTC leveraged products to speculate on the short-term price movements in a given financial underlying. The products are traded over the counter, and their pricing, settlement and trading terms are not standardized. Typically, the products are offered through online trading platforms, and often with aggressive or misleading marketing campaigns. Several studies show that a large majority
of retail investors in these complex products lose money.
IOSCO proposes the following policy measures in the report and offers guidance to regulators on how to apply each one:
• A licensing requirement for all firms that sell the relevant products to retail investors either domestically or on a cross-border basis;
• Leverage limits or minimum margin requirements;
• Measures to address the risk of investors losing more than their initial investment;
• Measures to enhance the disclosure of costs and charges of the products;
• Measures to improve the disclosure of risks of the products, including profit and loss ratios;
• Other focused requirements to enhance the quality of pricing and order execution; and,
• Measures to restrict the sale, distribution and marketing of the products with a view to
addressing mis-selling risk.
IOSCO is seeking feedback on the tools and measures proposed in this report. After reviewing comments received from the public, IOSCO will prepare a final report. Therefore, IOSCO asks that comments on this consultation report be submitted on or before 27 March 2018.