ESMA has decided to extent the ban of the marketing, distribution or sale of binary options to retail clients, which has been in effect since 2 July, for another three months. The regulator has also agreed on the exclusion of a limited number of products from the scope of the measure.
On 1 June, the European Securities and Markets Authority (ESMA) had formally adopted a restriction on the marketing, distribution or sale of CFDs to retail investors and an outright prohibition of such activities for Binary Options, which it had already announced at the end of March. These measures applied from 2 July 2018 for binary options and from 1 August 2018 for CFDs, each for a three month period. Thus the binary options ban was due to expire on 1 October and made a decision by the regulator as to whether it wanted to extend the measure. ESMA stated that it therefore has carefully considered the need to extend the intervention measure currently in effect. ESMA considers that a significant investor protection concern related to the offer of binary options to retail clients continues to exist. Thus, it has agreed to renew the prohibition from 2 October.
ESMA considered during its review of the intervention measure 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 considers 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.
In addition, 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.
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 will continue to keep these products under review during the prohibition period. The renewal was agreed by ESMA’s Board of Supervisors on 22 August 2018.
ESMA will now also have to decide whether it wants to extend the restriction on the marketing, distribution or sale of CFDs to retail investors, which will expire on 1 November.
As part of its initial decision, ESMA has published Q&As, which provided some clarity on a number of questions that originally had not been addressed. Eventually, it spells more difficult times for CFD and Binary Options platforms. The announcement in March and in June were just the logical consequence of a process that started with an ESMA statement last year where it referred to the work of its CFD Task Force that goes back even further and was established in July 2015. The regulator had been concerned about the provision of speculative products such as CFDs, rolling spot forex and binary options to retail investors for a considerable period of time. It therefore conducted ongoing monitoring and supervisory convergence work in this area for more than 2 years, but the outcome was that ESMA remained concerned that these supervisory convergence tools were not sufficiently effective to ensure that the risks to consumer protection are controlled or reduced that would satisfy the financial watchdog.