After surveying members of its Committee for Regulation of Market Intermediaries, IOSCO described risks to retail investors relating to marketing and selling complex over-the-counter ("OTC") leveraged products. In a "Final Report on the IOSCO Survey of Retail OTC Leveraged Products," IOSCO focused on (i) rolling-spot foreign exchange ("forex") contracts, (ii) contracts for differences ("CFDs"), and (iii) binary options.

Generally, survey respondents (i.e., regulatory agencies) expressed concerns related to:

  • unregulated firms that typically were based abroad;
  • issues pertaining to the quality of order execution;
  • difficulties relating to the withdrawal of client funds;
  • the poor performance of products, which resulted in clients' losses;
  • aggressive or misleading marketing and sales practices;
  • faulty management of conflicts of interest, as well as credit and market risks from continuity planning, among relevant firms and businesses; and
  • firms acting without required authorization or registration, often while conducting fraudulent activities in retail markets.

IOSCO stated that it will continue to evaluate the concerns identified in the report. IOSCO intends to "consider possible future courses of action with a view to enhancing investor protection" due to the "significantly cross-border dimension of this on-line retail market."

Commentary / Nihal Patel

The report is more descriptive than prescriptive. The survey results show that regulators dislike these types of products, particularly when they are sold to "retail" investors. As noted in the report, it is already illegal in the United States to sell most of these types of products to retail investors (or in the case of the FX, only upon registration with the CFTC). U.S. securities and commodities regulators have responded with a number of enforcement actions, and published cautionary statements for the benefit of the public. See, e.g., SEC Investor Alert: Binary Options and Fraud (June 6, 2013); " Two Firms Charged with Unlawful Off-Exchange Binary Options Trading" (July 29, 2016); NFA Notice I-14-16: Diminutive Notional Value Contracts (June 25, 2014).

This is not to suggest that these types of products are "bad" per se. However, IOSCO's report does serve as a reminder that firms involved in marketing these products should continue to ensure diligently that they are not sold to ineligible or unsuitable investors.

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