2018年9月3日

Binary option ban extended, subject to certain exclusions

Binary options ban extended, subject to certain exlusions

On 2 July 2018, the European Securities and Markets Authority (ESMA) prohibited the marketing, distribution or sale of binary options to retail clients. On 24 August 2018, ESMA issued a press release confirming that this prohibition would continue for a further three months from 2 October 2018. However, responding to feedback from industry, ESMA has decided to exclude certain types of binary option from the prohibition going forward.

What was banned and why?

In the run up to the prohibition that was effected on 2 July 2018, ESMA claimed that 80% of binary options entered into resulted in losses for the respective consumer. For this reason, ESMA utilised its product intervention powers under MifiD for the first time, and banned the sale of binary options to retail consumers for the maximum period of three months. MiFiD requires that a product intervention is revisited every three months and only renewed if required.

Exclusions

In its press release dated 24 August 2018, ESMA explained that it considered "the specific features of binary options currently within the scope of the measures," when reviewing the product intervention that was in effect. In doing so, ESMA concluded that certain binary options, which already incorporate investor protection measures, should necessarily be excluded from any ban going forward.

What types of binary option will not be prohibited going forward?

Following its review of the intervention, ESMA decided to exclude the following types of binary option from any prohibition going forward:

  • Binary options 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, transactions fees and other related costs; and
  • Binary options that cumulatively meet the following three conditions:
    • the term from issuance to maturity is at least ninety (90) calendar days; and
    • a prospectus has been drawn up and approved in accordance with the Prospectus Directive (2003/71/EC) and 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 of 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.

The upshot of the above is that where the two outcomes of a binary option are such that it is not possible for an investor to lose more than was originally invested, this type of product would fall outside of the intervention. Similarly, where a binary option is subject to a term of at least 90 days, is backed by a prospectus and is fully hedged by the provider or a company in its group - it would also fall outside of the scope of the intervention.

What next?

The intervention that was brought into effect on 2 July 2018 is still in force and will remain in force until 2 October. Therefore, those binary options that will be excluded in future, remain prohibited and should not be sold to retail consumers until that date. Some may recall that the original product intervention of 2 July also placed severe restrictions on the sale and marketing of contracts for difference (CFDs). It is currently unclear as to whether this will continue in its current form. Interested firms and individuals are advised to check the ESMA website for updates or stay tuned for more E-Alerts from Taylor Wessing.

Here to help

Taylor Wessing is ideally placed to advise on financial regulatory matters, including ESMA's product intervention. For more information, please contact one of our experts.

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