ESMA extends binary options limits

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Ban – How To Avoid The ESMA Ban On Binary Options

A ban on binary options has been in place since 2nd July 2020 in Europe. The European regulator, ESMA placed a temporary ban on binaries and have maintained it ever since. EU Traders can avoid the ban however, and continue trading. So what are the options for traders impacted by the ban?

Binary Ban Explained

The European Securities and Markets Authority (ESMA) implemented a ban on binary options in July 2020. They were convinced that this measure would protect consumers and resolve the deluge of complaints they had received over the previous decade.

The number of frauds linked to binary options was huge, and rather than prosecute the scams, ESMA decided instead to simply halt the supply and marketing of binary options “to retail traders”.

The ban was originally implemented temporarily, for three months. It also coincided with restrictions on CFD and Forex trading in Europe.

Extension

Since the original ruling, both the ban on binary options and the related restrictions have been extended:

  • From 1st July 2020 to the 1st of October
  • Then from October to the 1st January 2020
  • And again from January to 1st April 2020.
  • On February the 18th 2020, ESMA confirmed they would extend the ban again, this time to 1st June 2020

During this period, very little in the way of research has been done by ESMA, to see how effective the ban has been. For example, the original scams were already breaking the law – so have they adhered to the ban? The simple answer to that is “no”. They have however, branched out into cryptocurrencies – another area where regulators are years behind.

The official text on each extension has been exactly the same, bar the dates. This suggests very little thought has gone into the extensions and they are a simple ‘cut-and-paste’ press release.

With that said, it seems certain that the ban will remain in place, restricting the availability of binary trading to traders in the EU. So what can traders do?

How To Avoid The Ban

Traders actually have a few choices when it comes to trading from within the EU. There are positives and negatives to all of them, but it is possible for traders to carry on, and that is the important thing.

Firstly, trading with an unregulated broker that still accepts EU traders is to be avoided at all costs. One side-effect of the ban is that many consumers have been inadvertently ‘pushed’ towards unregulated firms. This is not a safe route. Here are some methods to continue trading in a safe, legal way.

Alternative Products

Many reputable brokers have created new products to fill the gap left by the ban. IQ Option created FX Options and IG offer Knock-outs for example. While these are not strictly ‘binaries’, they share many traits and similar strategies will work on both.

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Brands are looking at new products all the time, so look out for marketing information.

Non-EU Branches

One less well known choice for traders, is to move their account to a regulated arm of their existing broker. That is right, you might be able to carry on with your existing broker…

There are two key points here. Firstly, this is only possible where the broker has multiple regulated brands, in other words, separate brands in each jurisdiction (or off-shore). For example. Some brands have different registered companies, regulated separately – “XXX Europe Ltd” for example, but with “XXX Malaysia Ltd” as well.

It is possible for you to request an account with the Non-EU or off-shore branch of the business. ESMA allow this to happen – but brands are not allowed to market the possibility. The request has to come from the trader, and not be prompted by the firm themselves or marketing sources.

Use A Professional Account

This choice will only be available to certain traders. Basically, if a trader registers as a professional, they are saying they are experienced enough to trade high risk / high reward products like binaries, and acknowledge that in doing so, they give up regulatory protection. (Note ESMA specifically reference “retail traders” in their ban – not professional traders.)

To register as professional, traders must prove a certain level of trading experience (2 years in a financial service role for example). They must also prove a certain level of trading capital (500k) – though this can be spread between multiple accounts.

In addition to opening up binary options again, registering as a professional will also mean traders can trade CFDs and Forex with much higher levels of leverage. The trade off is that professional traders lose regulatory protection.

Conclusion

So there we have it. The binary options ban does not have to mean the end of you trading binaries. If the ban stops uninformed traders getting their fingers burnt – but experienced traders can carry on using them, then the industry, while smaller, will be better off long term.

ESMA extends Binary Options ban

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 adopteda 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 2020 for binary options and from 1 August 2020 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 prohibitionfrom 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 2020.

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 2020. 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.

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The ESMA introduces limitations for binary options and CFDs in order to protect the investors

The Supervisory Board of the European Securities and Markets Authority (ESMA) agreed on measures to limit the provision of contracts for difference (CFD) and binary options to retail investors in the European Union on March 23, 2020.

Agreed measures include the following:

  1. Binary options: a ban on marketing, distribution or sale of binary options to retail investors.
  2. Contracts for difference: restriction on marketing, distribution or sale of CFD to retail investors. Possibilities of any transactions with contracts for difference, allowing retail investors to play on spreads (difference between the best prices of orders for a sale and the purchase of an asset at the same time) are significantly restricted.

Significant problem of investor protection

The ESMA, along with the National Competent Authorities (NCA), concluded that there is a significant problem of protecting the interests of investors in relation to CFDs and binary options. The foregoing is due to the complexity of processes and lack of transparency. Binary options and CFD inhere a built-in conflict of interest between providers and their customers, as well as risks of discrepancies in expected profits and losses.

The analysis of NCA on CFD trade in various EU jurisdictions shows that 74-89% of retail accounts usually lose money on their investments, with an average loss per customer ranging fr om 1,600 to 29,000 euros. The NCA analysis for binary options also showed permanent losses on the accounts of natural clients.

“The opportunities for generating a large income, simplicity of digital platforms and record low interest rates attract retail investors. But they suffer significant losses due to the complexity of financial products and excessive use of financial leverage”, commented Stephen Mayor, Chairman of the Supervisory Board.

List of agreed measures

In accordance with article 40 MiFID, the following decision was made:

  1. Set limits of leverage (indices or multipliers) for retail investors are limited: from 30:1 to 2:1. Indicators vary depending on the volatility of main leverage:
    • 30:1 – for main currency pairs;
    • 20:1 – for non-core currency pairs, gold and major indices;
    • 10:1 – for goods other than gold and foreign exchange indices;
    • 5:1 – for individual shares and other control values;
    • 2:1 – for crypto conversions.
  2. Introduction of margin closing rule for each account. The foregoing will allow to standardize the margin percentage (with 50% of minimum required margin) due to which providers must close one or more open CFDs of retail customers.
  3. Ensuring protection against negative balance for each account. This will provide a total guaranteed lim it on the losses of retail customers.
  4. Establishing a restriction on incentives in the sphere of CFD trade.
  5. Standardizing the risk warning, including percentage of losses in the accounts of retail investors of CFD provider.

Next steps

The ESMA intends to publish the indicated measures in the Official Journal of the EU in the near future, and they will start to operate for binary options in a month, and for CFDs – in two months. Upon expiry of three months after start of application of the restrictions, the ESMA will re-consider the situation and may extend the validity of the measures.

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