German regulator to keep in place ban on offering of binary options to retail clients

The marketing, distribution and sale of binary options to retail clients will remain prohibited in Germany, the Federal Financial Supervisory Authority (BaFin) has announced.

The ban is outlined in a general administrative act issued by BaFin in response to the pending expiry of the product intervention measure imposed by the European Securities and Markets Authority (ESMA).

As FinanceFeeds has reported, BaFin first outlined its proposals to ban binary options on a permanent basis at a national level back in November 2018. The measure has been approved by ESMA.

In particular, BaFin sees risks and thus considerable investor protection concerns in that binary options are complex and lack transparency, especially with regard to the calculation of their performance and the underlying. Unlike other financial instruments, binary options are not traded on a market where prices result from supply and demand. Instead, it is the provider who determines the price, and clients are not in a position to understand it or check its accuracy.

As binary options typically are extremely short-term instruments, the watchdog warns that it is difficult for retail investors to accurately assess the risk-return profile. Moreover, binary option providers usually act as the direct counterparty to their clients’ trades. This places the provider’s interests in direct conflict with those of its investors. For instance, there is a risk that providers will manipulate the price of the underlying at expiry of the binary option or change the term of the binary option by seconds or milliseconds so as to avoid having to pay out on the option contract.

The marketing, distribution and sale of binary options to retail clients have so far been prohibited in the European Union due to a temporary measure imposed by ESMA. This measure expires on July 1, 2019. BaFin’s general administrative act will be applicable from July 2, 2019.