ESMA to renew prohibition against binary options for a further three months

Chris Hamblin

24 August 2018

ESMA stated concern is to protect investors from sharp practice. In accordance with the Markets in Financial Instruments Regulation or MiFIR, ESMA can only introduce temporary 'intervention measures' for three months at a time, subsequently renewing them if it does not want them to expire automatically. During its review of this 'intervention measure,' ESMA looked at many binary options and found that some of them, in its long-winded phrase, "mitigate the risk of investor detriment." Some of them were long-term enough (at least 90 days) to be less harmful than others; they were accompanied by their own prospecti; and they were fully hedged by the providers or other entities in their groups that were acting as providers. As long as these three features were present, ESMA was satisfied.

ESMA is also excluding a type of product that at the end of the term has one of two predetermined pay-outs, neither of which is less than the initial investment of the client. The pay-out could be the higher or lower one but in either circumstance the investor cannot lose money in comparison with his total investment. As long as the investor’s capital is not at risk, ESMA is happy.

The super-regulator is therefore excluding the following from the renewal of its ban.

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.
A binary option that meets all 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) it does not expose the provider to market risk throughout the term of the binary option; and (d) the provider and/or any entities in its group does not make a profit or loss from the binary option, other than previously disclosed commissions, transaction fees or other related charges.

ESMA will keep these products under review. The renewal of its prohibition was signed off by its board of supervisors on 22 August - a mere month-and-a-half into the ban. This suggests that the ban is going to continue for a long time to come. ESMA is working on a single rulebook for EU financial markets. It released the first instalment online in February, referring to it as 'a service' and 'a tool.'