ESMA Extends Prohibition of Binary Options until 2019

The European Securities and Markets Authority (ESMA) announced today that it will continue to prohibit the marketing, distribution and sale of binary options to retail clients for another three months, effective from October 2, 2018. During the extension, the European regulator will exclude a limited number of products from the prohibition.

According to the statement, the watchdog still believes that binary options pose a significant risk to investors. Therefore, it has decided to extend the prohibition, which has been in effect since July 2, 2018.

Exemptions from prohibition

However, the regulator has identified that some binary options do not pose a significant threat to retail investors and are therefore no longer included in the scope of the measures. Specifically, ESMA decided that binary options that are long-term investments (at least 90 days), that are accompanied by a prospectus and that are completely hedged by the provider or another entity in the same group, are less likely to cause significant harm to investors.

In addition, the regulator has also stated that binary options which have one of two predetermined payouts at the end of the term, neither of which is less than the initial investment of the trader, will be excluded.

The payout can be either the higher or lower one as long as in either circumstance the investor doesn’t lose money in comparison to their total investment. This is because the trader’s capital isn’t at risk. Therefore, the regulator has explicitly excluded this product from the measures.

The extension of the prohibition period was agreed by ESMA’s Board of Supervisors on August 22, 2018. During the extended period, the regulator will continue to keep a close eye on binary options.

For any product interventions that the European watchdog undertakes, the initial validity is three months. However, ESMA can continue to renew the action indefinitely. The only reason the regulator may reverse the action is if it faces a large backlash from consumers. However, the chances of the actions being reversed are still highly unlikely.

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