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#1 24-12-2019 11:06:20

johnedward
Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 3068
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Are turbo certificates the solution to CFD restrictions?

Are turbo certificates the solution to CFD restrictions?


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With leverage restrictions now permanent for contracts for differences (CFDs) across Europe, and with other nations seeking to do the same, could a different investment product replace CFDs? Such as turbos certificates?

Turbo certificates, which are not covered by the ESMA rules, are similar to CFDs but have a few differentiating features.

Turbos and CFDs: the main differences

Both turbo certificates and CFDs are traded using leverage and, with the exception of CFDs on futures, they don't expire. However, certificates are structured products whose upward return is a derivative of the underlying security which offers a guaranteed return.

Turbos certificates allow traders to profit from market fluctuations with leverage, they have a built-in stop loss, and positions are closed automatically when a predetermined price level is reached. For example, a long turbo certificate allows you to profit from higher prices, while a short turbo certificate enables you to profit from dropping prices.

CFDs are closer to futures and traders risk unlimited losses when prices move in the wrong direction; turbo certificates are closer to options where the loss is effectively limited to the premium that has been paid.

As Mazhar Manzoor, Director of Risks, Regulation and Financial Crime at ESMA Compliance Consultants, says, turbo certificates have the following characteristics:

Arrow They are considered to be transferable according to Article 4 (1), point 44 (c) of the MiFID;
Arrow They are generally listed and traded on a regulated market or a multilateral trading facility (MTF), which includes additional transparency requirements;
Arrow They are not margin products, which means that traders must pay transaction fees to conclude the contract;
Arrow They have no contingent liabilities for individual traders, that is to say that after the purchase of the security, they cannot be held responsible for an additional payment when the transaction ends or the position is closed (other than commissions or transaction fees);

Regulators are monitoring turbocharged certificates

In some EU countries, such as Germany, Belgium and Austria, certificates are long-established products and constitute a basic offer from banks. However, brokers who traditionally offered forex and CFDs, are increasingly entering this space.

The shift has caught the attention of regulators. However, for the time being, they remain outside the scope of the EU's restrictions on leverage.

The FCA has raised concerns about the increase in the number of CFD-like products that are offered to retail traders with higher leverage. Specifically, the regulator believes that products with similarities to CFDs could still cause significant losses.

Commenting the rise in turbocharged certificates, the British regulator says: "This is why we will work with ESMA and other regulators to monitor and evaluate the sale of these alternative and speculative products to traders. If we have evidence that these products cause similar damage, we will work with ESMA and, if necessary, support other actions aimed at widening the scope of intervention."

Are certificates the answer to CFD restrictions?

Although turbo certificates have some similarities to CFDs, they are not the same. From a broker's point of view, CFDs are easier to present and sell to traders because they are easier to understand. In addition, the income brokers can earn from certificates is limited compared to what they can get from CFDs, even with restrictions on leverage.

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