The Irish regulator, the Central Bank of Ireland (“CBI”), is intent on using its product intervention powers to limit certain types of exotic investment products thought to be too complex for retail consumers. The CBI has taken measures to restrict the marketing, distribution or sale of binary options and contracts for difference (“CFDs”), to retail clients in or from Ireland. The measures are taken pursuant to product intervention powers available to it under Article 42 of the Markets in Financial Instruments Regulation (“MiFIR”).
Other EU Member States have already adopted product intervention measures for binary options and CFDs, but this is the first time that the CBI has used its intervention powers. Previously, only the suitability requirements under the Markets in Financial Instruments Directive (“MiFID”) applied to structured products in Ireland. The suitability requirements will remain, but the CBI intervention measures will constitute another test to be passed for structured products.
The CBI considers certain binary options to have no place in the investment plans of retail investors. The prohibition on the marketing, distribution and sale of ‘capital-at-risk’ and certain other binary options is set out in the CBI Binary Options Intervention Measure (“BOIM”). Under BOIM, “binary option” is defined to mean a derivative: (i) that must be cash-settled or may be cash-settled at the option of one of the parties other than by reason of default or other termination event; (ii) that only provides for payment at close-out or expiry; or (iii) whose payment is limited to a predetermined fixed amount or zero depending on whether the underlying of the derivative meets one or more predetermined conditions.
However, BOIM does not apply to a binary option: (i) for which the lower of the two predetermined amounts is at least equal to the total payment made by the retail client for the binary option, including any commission, transaction fees and related costs (so-called ‘capital protected’ products); (ii) with a term from issuance to maturity of at least 90 calendar days; (iii) in respect of which a prospectus drawn up and approved under the Prospectus Directive or the Prospectus Regulation is available to the public; or (iv) which does not expose the provider to market risk throughout the term of the binary option and the provider or any of its group entities do not make a profit or loss from the binary option, other than previously disclosed commission, transaction fees or other related charges.
BOIM took effect on 2 July 2019, replacing the European Securities and Markets Authority (“ESMA”) temporary product intervention measure which expired on 1 July 2019.
The restrictions on the marketing, distribution and sale of CFDs are set out in the CBI Contracts for Difference Intervention Measure (“CFDIM”) of 12 June 2019. CFDIM defines a “CFD” as a derivative other than an option, future, swap or forward rate agreement, the purpose of which is to give the holder a long or short exposure to fluctuations in the price, level or value of an underlying, irrespective of whether it is traded on a trading venue, and that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event.
However, CFDIM permits the marketing, distribution or sale to retail clients of CFDs in or from Ireland where the CFD provider: (i) requires the retail client to pay the initial margin protection amount (at least) prescribed by CFDIM; (ii) provides the retail client with the margin close-out protection amount (at least) prescribed by CFDIM; (iii) provides the retail client with the negative balance protection prescribed by CFDIM (or any greater protection); (iv) does not directly or indirectly provide the retail client with any monetary or certain non-monetary benefits in relation to the marketing, distribution or sale of a CFD, other than the realised profits on any CFD provided; and (v) provides the appropriate risk warning specified by and complying with the conditions in Annex II of CFDIM.
The CFDIM will take effect on 1 August 2019, replacing ESMA’s temporary product intervention measure which will expire at that time.
It remains possible to create these types of products, but providers must now consider the CBI intervention measures, as well as the suitability requirements under MiFID.
The CBI measures do not appear to affect the broader structured products market in Ireland, as they do not cover products structured as insurance contracts, structured deposits or notes. However, these are the first exercise of intervention powers by the CBI and there are likely more to come, so future developments promise to be both interesting and important.