ESMA agrees on another three-month extension of binary options ban

Maria Nikolova

The renewal of the prohibition will apply from January 2, 2019.

The European Securities and Markets Authority (ESMA) today announces that it has agreed to renew the ban of the marketing, distribution or sale of binary options to retail clients, in effect since July 2, 2018, for a further three-month period.

In explaining the rationale for its decision, ESMA says it has carefully considered the need to extend the intervention measure currently in effect. The regulator believes that a significant investor protection concern related to the offer of binary options to retail clients is still present.

ESMA has therefore agreed to renew the measure from January 2, 2019 on the same terms as the previous renewal decision that started to apply on October 2, 2018.

Let’s note that, as per the terms of the previous extension of the prohibition, ESMA has excluded a limited number of products from the scope of the measure. The regulator said back then it had considered the specific features of binary options currently within the scope of the measures. Certain binary options were found to have specific features which mitigate the risk of investor detriment, namely:

  • they are sufficiently long-term (at least 90 days);
  • are accompanied by a prospectus;
  • and are fully hedged by the provider or another entity within the same group as the provider.

ESMA found that a binary option that benefits from the cumulative effect of these three criteria was less likely to lead to a significant investor protection concern.

Also, products that at the end of the term have one of two predetermined pay-outs, neither of which is less than the initial investment of the client, will be excluded. The pay-out for this type of binary option could be the higher or lower one but in either circumstances the investor would not lose money compared to their total investment. As the investor’s capital is not at risk these products should be explicitly excluded, the regulator says.

Hence, ESMA agreed to exclude from the scope of the renewal the following binary options:

  • a binary option for which the lower of the two predetermined fixed amounts is at least equal to the total payment made by a retail client for the binary option, including any commissions, transaction fees and other related costs; and
  • a binary option that meets cumulatively the following three (3) conditions:
  • (a) the term from issuance to maturity is at least ninety (90) calendar days;
  • (b) a prospectus drawn up and approved in accordance with the Prospectus Directive (2003/71/EC) is available to the public; and
  • (c) the binary option does not expose the provider to market risk throughout the term of the binary option and the provider or any of its group entities do not make a profit or loss from the binary option, other than previously disclosed commissions, transaction fees or other related charges.

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