The financial regulatory authority in the UK warned about the emergence of new complex structured instruments – Turbo certificates, which UK brokers may try to sell to retail clients in an attempt to get around ESMA’s new leverage cap on forex and CFD trade.
Basically turbo certificates allow traders to benefit from market fluctuations with a leverage. With Turbo Long Certificates you benefit from rising prices, while with Turbo Short Certificates from falling ones. And because leverage is integrated in the certificate, every incremental movement in the price of the underlying asset may lead to disproportionately high returns.
You risk, however, to loose your entire capital, if an initially set price barrier is reached. In the case of Turbo Long Certificates the barrier is set below the current price, while Turbo Short Certificates will have the barrier set above the current price of the underlying asset. The leverage effect comes from the lower purchase price of a Turbo Certificate relative to the direct investment in the underlying asset. The lower the purchase price of the Turbo Certificate, the higher the leverage. Turbo Certificates can be with or without an expiry date.
The new leverage cap, part of a larger ESMA regulation aimed at curbing risk investments in Europe, came in to force on August 1st.
In a statement FCA said it fully supports ESMA’s measures, which are aimed to protect retail investors, but it also warns of other products that can create the same kinds of risks to consumers as CFDs, particularly where they expose investor to significant leverage. The concern is that such substitute products could be sold under a variety of labels, but share common features with CFDs and may result in significant losses to the retail clients.
Regarding the marketing of Turbo certificates the British regulator states that, “we will therefore work with ESMA and other European regulators to monitor and assess the sale of these alternative, speculative products to retail clients. If we have evidence that these products are causing similar harms, we will work with ESMA and will, if necessary, support further action to extend the scope of its intervention”.
The new ESMA rules limit the leverage for major currency pairs to 1:30, for non-major currency pairs, gold and major indices to 1:20, for commodities other than gold and non-major equity indices to 1:10, for individual equities and other reference values to 1:5 and for crypto currencies to 1:2.