ESMA renews prohibition on binary options

On 24 August 2018, the European Securities and Markets Authority (ESMA) published a press release renewing the prohibition of the marketing, distribution and sale of binary options to retail clients, which has been in force since 2 July 2018. The renewal will be applicable from 2 October 2018 and shall remain in place for a further three-month period. Additionally, ESMA decided to exclude a limited number of products from the scope of the intervention measure.

Objectives

ESMA concluded that the renewal of the prohibition was necessary, given that the offer of binary options to retail clients continues to raise important concerns in terms of investor protection. There are, however, certain types of binary options that mitigate risks for investors, due to their specific characteristics or the fact that they do not put the investor’s capital at risk. Therefore, these binary options need to be excluded from the scope of the intervention measure.

Exclusions

The renewal of the prohibition does not cover the following products:

• 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
• binary options that satisfy cumulatively the following criteria:
• the term from issuance to maturity is at least 90 calendar days;
• a prospectus drawn up and approved in accordance with the Prospectus Directive is available to the public; and
• 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.

Next steps

ESMA will continue to review these binary options in the course of the prohibition period. Following its adoption in the official languages of the EU and the publication of an official notice on ESMA’s website, the renewal measure will be published in the Official Journal of the EU.

The above article was co-authored by Michael McKee and Georgia Karamani.