German regulator unveils plans for binary options ban

Maria Nikolova

BaFin is thus preparing for the expiry of the product intervention measure introduced by ESMA.

The German Federal Financial Supervisory Authority (BaFin) is taking the fight against binary options scams seriously. Earlier today, the regulator presented its plans for a national prohibition on offering binary options to retail clients.

The German supervisor is thus preparing for the expiry of the product intervention measure introduced by the European Securities and Markets Authority (ESMA). Let’s recall that, ESMA has recently extended the ban for further three months effective January 2, 2019.

In particular, BaFin sees risks and thus considerable investor protection concerns in that binary options are complex and lack transparency. The regulator notes that, 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, without its clients being able to understand or examine this. Due to the generally extremely short terms, it is exceedingly difficult for retail clients to accurately assess the risk-return profile.

Furthermore, binary option providers usually act as the direct counterparty to their clients’ trades. The interests of providers thus directly conflict with those of their clients. For instance, providers could 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 is already prohibited in the European Union under to a temporary measure imposed by the European Securities and Markets Authority (ESMA). BaFin’s envisaged general administrative act will maintain this prohibition once ESMA’s measure expires.

The general administrative act outlining the proposed ban has been published on BaFin’s website. Written responses may be submitted until December 20, 2018.

Other countries, like France, have also voiced their concerns about the offering of risky products to retail investors once the ESMA product intervention measure expires and the pan-EU watchdog stops extending the restrictions. In a recent speech, Robert Ophèle – Chairman of France’s financial markets authority AMF, warned that once ESMA does not renew the rules for CFDs and binary options, there will be a multitude of national regimes regarding the offering of these products. This will result in chaotic surveillance of products that are marketed online.

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