The Dutch regulator AFM has announced intervention measures for trading and listing Turbos. These measures aim to protect investors in the Netherlands by preventing professional market participants, such as Turbo issuers, liquidity providers and market makers, from offering instruments to retail investors if their leverage is above specific limits fixed by the AFM (the same limits that are currently applied to CFD trading).
In effect, from 1 October 2021, issuers are no longer able to issue new Turbos with a leverage above the maximum authorised limit if they are intended for Dutch investors.
But the leverage is a dynamic parameter. An instrument that today has a leverage below the maximum authorised level may tomorrow have a leverage above that limit. Conversely, the leverage may be above the maximum authorised level at one point in time, and fall below that level at a later time.
To deal with this dynamism, the AFM measures also require that liquidity providers and market makers (and in fact any professional market participant) do not provide any offer (sell order) on instruments with a leverage above the maximum authorised level. If the leverage later decreases below the maximum authorised level, professional market participants are allowed once again to provide an offer, but only for as long as the leverage remains below the limit. If it does go above the limit again, professional market participants will be required again to stop providing an offer, until the leverage drops below the limit once more.
In theory, there may be some cases when a Turbo leverage is just at the maximum level and, due to the price variations of its underlying, continues to move above and below the limit. As a result, professional market participants may find themselves able to post offer prices and then immediately required to remove them, or vice versa, triggering some slightly confusing situations.
FAQ
Turbo trading measures explained in detail
Turbos are leveraged products, aimed at enhancing returns in the short-term or at hedging an investor’s portfolio in the medium term. The underlying asset can be a single stock, an index, a currency pair, or another underlying, with a tailor-made gearing.
The maximum leverage authorised by the AFM measures depends on the type of underlying and/or the underlying itself.
The table below summarises the maximum leverages. Please refer to Annex I of the AFM’s Decision on restrictions on Turbos for the official list.
|
Underlying Type |
Underlying |
Maximum Leverage |
|
Currency |
USD, EUR, JPY, GBP, CAD, CHF |
30 |
|
Currency |
Any other |
20 |
|
Index |
FTSE 100, CAC 40, DAX30, DJIA, S&P 500, Nasdaq, |
20 |
|
Index |
Any other |
10 |
|
Commodity |
Gold |
20 |
|
Commodity |
Any other |
10 |
|
Crypto Currency |
Any |
2 |
|
Share |
Any |
5 |
|
Anything not listed above |
5 |
|
As stated in the AFM’s Feedback statement (page 9) from 30 June 2021: “the leverage cap does not apply to the offer price that is issued for or on behalf of the retail investor”.
Retail investors who have purchased a Turbo should be able to sell it back, even if the instrument’s leverage has reached a level above the maximum levels authorised by the AFM intervention measures.
Therefore, what is called “Client–Client trading”, i.e. a retail investor selling to another retail investor (a Turbo with a leverage above the maximum authorised levels), is out of the scope of the AFM intervention measures, and is thus authorised.
The leverage is the representation of how volatile the price of a Turbo can be in relation to the variation of its underlying price.
For example, the price of a Turbo with a leverage of 10 will vary 10 times faster than the price of its underlying.
The information needed to calculate the leverage is:
- The Turbo price
- The Turbo ratio (or parity)
- The underlying price
- The exchange rate (if the underlying price is in a currency different from the Turbo currency)
The Turbo price, the underlying price and the exchange rate (if applicable) are dynamic by nature (they evolve over time). As a result, the leverage is also dynamic and changes as these three parameters evolve.
Therefore, the leverage only applies to small variations of the underlying price, as it constantly evolves as the underlying price evolves.
In short, when the leverage of an instrument reaches the maximum authorised level, the liquidity provider (the issuer) must go Bid-Only, i.e. only have a bid (buy) order in the orderbook and no more offer (sell) orders.
Regulatory framework
In January 2021, the Dutch Authority for the Financial Markets (AFM) conducted a consultation with market participants regarding its planned introduction of measures to limit trading in high-leverage Turbo warrants. The AFM considers that Turbos and CFDs (Contracts For Difference) have a similar risk profile, and wishes to apply to Turbos the same restrictions that have been applied to CFDs across Europe since 2018.
On 8 June 2021, the European Securities and Markets Authority (ESMA) concluded that the intervention measures proposed by the AFM were justified and proportionate (see ESMA’s Opinion on product intervention measures on Turbos). On 30 June 2021, the AFM announced that its intervention measures would enter into force on 1 October 2021 (see the AFM’s Decision on restrictions on Turbos).
Bid-Only is a trading status which indicates that the liquidity provider (usually the issuer) is only on the bid (buy) side in the orderbook. In other words, the liquidity provider is only buying back instruments that have already been sold to investors, but it is not selling any additional instruments.