Turbo Certificates vs. CFDs

Dec 12, 2019

Although CFDs and Turbo Certificates have common characteristics, ESMA’s restrictions do not extend to such investment product as Turbo Certificate. So, let’s find out why?

What is the difference between Turbo Certificates and CFDs? Both instruments trade with leverage and do not have expirations. However, Turbos offer a guaranteed return as these are structured products whose upside return is a derivation of the underlying security. Certificates have a built-in stop loss, and positions are automatically closed once a predefined price level is achieved. This allows investors to get profit from market fluctuations with leverage. For instance, Turbo Short Certificates benefit from dropping prices and Turbo Long Certificates allow you to benefit from growing prices.

As opposed to certificates, contracts for difference are easier to pitch and sell since these are more understandable if we look from the brokers’ perspective. Moreover, CFDs may be more profitable for brokers than the certificates even if the leverage restrictions are applied.

However, CFDs involve the risk of unlimited losses in case if the prices go up against the trader. Turbo Certificates in turn, are more similar to options where loss is restricted to the premium paid.

Here are some highlights of the Turbos features:

  • MiFID qualifies Turbo Certificates as transferable security;
  • They are usually traded on a regulated market or MTF (multilateral trading facility) that involve extra transparency obligations;
  • Turbos are not margined products;
  • Investors can’t change the leverage of the certificates;
  • Turbo Certificates do not impose a liability on retail clients meaning that they will not be liable for further payment once the position is closed or the transaction is completed.

Although the Turbo Contracts are outside the scope of EU leverage restrictions yet, regulators have started to draw attention to them. It worth noting that certificates are a core offering of banks and this product was established long ago. However, there is a growing tendency among brokers that are starting to involve into the certificates offering along with traditional forex and CFDs offering.

According to the British regulator, more and more products close to CFDs are being offered to retail clients at a higher leverage. The source of concern, as explained by the regulator, is that such products could still bring considerable losses to retail investors. The regulator stated that if it becomes evident that Turbo Certificates and other similar products bring harmful effects, it will work with ESMA on the extension of the scope of restrictions. However, ESMA itself is in no hurry to restrict the Turbos explaining that this particular product has different and more favorable features as opposed to CFDs.

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