Binary options have long been identified by regulators as a toxic product. Today the German regulator is taking things to the next level with the introduction of a permanent ban for offering binaries to retail traders.
The German financial regulator, BaFin is rolling out a measure that is set to inherit the ESMA’S temporary product intervention measures under MiFID.
According to an official publication made on the website of BaFin, the marketing, distribution, and sale of binary options to small investors are going to get banned.
“Binary options are a particularly attractive offer for small investors, especially in the current low-interest-rate phase,” explains BaFin Executive Director Elisabeth Roegele.
She highlights that the marketing of the product with a promise of high returns is making the product too risky for retail investors.
“Practice has shown that these products for retail investors are extremely lossy and very risky,” Roegele warns.
Misleading Retail Clients
The BaFin sees considerable risks stemming from the addictive nature of the product. According to the BaFin, the product is also very complex and non-transparent. This applies in particular to the calculation of the expiration price of the underlying asset.
The German regulator highlights that unlike other financial instruments, binary options are not traded on a market where supply and demand are determining the price.
The price is set out by the provider of the product, which leaves no opportunity for clients to verify the level.
Because of the usually extremely short maturities, investors don’t have any means to accurately assess the risk/return profile of the product. Last but not least, the BaFin highlights that binary options brokers regularly act as direct counterparty to their clients.
The inherent conflict of interest makes the offering unsuitable for retail investors.
The marketing, distribution, and sale of binary options to retail investors are already prohibited in the European Union. Earlier this year, the ESMA prompted a review of the product with two three-month terms.
The BaFin gives brokers and clients until the 20th of December 2018, to comment on the proposed measures in writing. The second round of product intervention measures discussed by the German BaFin lapses on the 2nd of January 2019.