MFSA Policy proposition - CFDs and Rolling Spot Forex under the MIFID

Dr. Priscilla Mifsud Parker co-authored with Giuseppe Signorelli | 02 Jun 2017

MFSA Policy proposition  CFDs Rolling Spot Forex MIFID


On the 17 October 2016, the Malta Financial Services Authority (“MFSA” or “Authority”) issued a consultation document on the proposed policy for online business distributing or intending to distribute Contracts for Differences (CFDs) and/or Rolling Spot Forex Contracts under the Markets in Financial Instruments Directive (MIFID) Regime.[1]

The consultation paper was issued after a the MFSA public notice of the 30 July 2015 following various issues occurred while handling applications in this sector as well as various risk warnings emanated at EU level whereby the high risks suffered by retail investors involved in forex trading have been highlighted.

The purpose of the consultation document was to provide a harmonized legislative framework for online forex investment firms licensed prior to the 30 July 2015 and investments firms licensed afterwards. In this way, all investment firms licensed in Malta providing online trading in CFDs and other complex products would be subjected to the same level of requirements.

The consultation document is proposing to define the term firm as being a Category 2 or Category 3 Investment Services Licence Holder authorized or in the process of being authorized to distribute complex speculative products. Although the array of firms offering such financial instruments may be quite vast the Authority identified two main types:

  • Firms acting as the client’s counterparty which offer the complex speculative products directly to retail clients; and /or
  • Firms acting as intermediaries between retail clients and liquidity providers.

The MFSA also issued a Feedback Statement on the comments received by the industry in respect of the proposed policies.

The proposed changes will lie on two main topics such as:

  • Capital requirements; and
  • Leverage limits.


Share Capital Increase

The policy proposition contained in the document is that “Companies applying for a Category 2 licence will be subject to a higher minimum initial capital requirement of Euro 730,000 similar to the initial capital requirement for Category 3 licence holders in light of the risks associated with this kind of business and potential loss of retail clients’ money. The said capital should be satisfied on an ongoing basis and not just at licensing stage”.

The reaction of the industry showed reservation towards the proposed increase of the capital requirements given the differences pertaining the risk and operational complexity of a Category 3 firm in respect of a Category 2.

Furthermore, it has been outlined that such proposition is not in line with what has been proposed by other overseas regulators thus hindering the position of Malta as a competitive financial centre. In this respect the industry has also raised the concern that the increase of the capital requirement does not play a crucial role in addressing investor’s protection, suggesting alternative measures in this respect.

Notwithstanding the industry’s concerns however the Authority confirmed its position regarding the capital requirement that has to be set at Euro 730,000.

This is because, as per MFSA’s statement, the Category 2 firms would still hold a significant amount of risk although for a very short period of time until such instruments are transferred to the counterparty.

Leverage Limits

As far as leverage[2] is concerned, the policy proposition states that “firms are required to set the leverage limits for retail and professional clients to a maximum of 1:50. This leverage limit shall be applicable across all platforms as made available to retail and professional clients on the firm’s website(s)”.

The reaction of the industry has been mainly focused on the distinction of retail and professional clients, as it is a general line of thought that professional and retail clients should not be treated equally.

It has been further highlighted, as per the capital requirement’s issue, that the discrepancy in the treatment among different jurisdictions (with more flexible requirements elsewhere) would jeopardize the competitiveness of Maltese licensed companies.

Moreover, the industry also noted that certain Maltese firms which are not licensed to deal in CFDs and which however have access to external platforms that deal in similar or same products will not be subject to the same leverage constraints. This would in turn affect the Maltese competitive advantage.

As an another argument to sustain such thesis the industry stated that the majority of retail clients are well aware of risks occurring in such speculative instruments and therefore the option of having wider leverage limits “affords these same individuals the liquidity to trade these instruments with significantly lower risk than they would in an unleveraged and an unhedged trading environment”.

The general thought coming from such assessment was that licence holders should be responsible enough to focus on investor disclosure and clients’ investments’ suitability and/or appropriateness, rather than imposing such leverage limits. With setting up such leverage requirements the Authority is actually de-risking rather than safeguarding investors’ interests.

MFSA’s position

The MFSA is of the idea that the operations of online business models offering MiFID investment services in relation to complex speculative products pose a high risk for retail customers who might not be fully knowledgeable with the risks associated with such trading.

According to this assumption, by setting the proposed leverage ratio the MFSA intends to protect retail clients from entering into transactions which are not in line with their risk profile.

However, the MFSA has duly noted the concerns raised by the industry with particular attention being given to the leverage limits for professional clients. On the other hand the MFSA is concerned with the possibility given to retail clients to opt to be treated by investment firms as professional clients in terms of MiFID, since clients would no longer benefit from the MiFID’s protection.

In the light of the above, the Authority has set the following maximum leverage limits to be adopted by firms:

  • For retail clients – 1:50;
  • For retail clients opting to be treated as professional clients in terms of MIFID – 1:100 and;
  • For all other clients – no leverage limits are being imposed.

As corollary, firms will be required in their COREP returns[3],to provide a breakdown in the classification of retail clients, including the ones electing to be treated as professionals.

The above mentioned policy will come into effect within six (6) months, - October 3, 2017. It is the intention of the Authority to incorporate such requirements in the Investment Services Rules.


[1] As a definition a contract for difference is meant to be a contract between two parties (buyer and seller) whereby is stipulated that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. If the difference is negative the buyer will in turn pay the seller. CFDs are financial derivatives that allow traders to take advantage of prices moving up (long positions) or prices moving down (short positions) on underlying financial instruments.

[2]  Leverage is intended as the investment strategy of using borrowed money (i.e. through the use of financial instruments or borrowed capital) to increase the potential return of an investment

[3] COREP (Common Reporting) is a common reporting system with applies to all credit institutions and investment firms operating in EEA with the aim to increase transparency in regulatory reporting by increasing the granularity of data requirements.

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