ESMA to extend ban on binary options for further three months

Maria Nikolova

Certain binary options with longer expiration periods will be excluded from the scope of the ban.

MiFID II implementation likely to be set back even further

The European Securities and Markets Authority (ESMA) has just announced that it has agreed to extend the ban on offering of binary options to retail investors for further three months.

The ban has been in effect since July 2, 2018. Under today’s decision, the prohibition will be renewed from October 2, 2018 for a further three-month period. The decision is based on the fact that a significant investor protection concern related to the offer of binary options to retail clients continues to exist.

Interestingly, ESMA has also agreed on the exclusion of a limited number of products from the scope of the measure. The regulator says it has 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 believes that a binary option that benefits from the cumulative effect of these three criteria is less likely to lead to a significant investor protection concern.

On top of that, 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.

ESMA intends to adopt the renewal measure in the official languages of the EU in the coming weeks, following which ESMA will publish an official notice on its website. The measure will then be published in the Official Journal of the EU and will start to apply from October 2, 2018 for a period of three months.

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