by Matthew Davis on January 31, 2019

ESMA extends binary option restrictions

In previous weeks European Securities and Markets Authority has announced that they are extending temporary restrictions on selling CFDs. Just a few days after the new announcement was made, stating that they have formally adopted a decision to renew the prohibition of marketing, distribution or sale of binary options to retail investors. The official announcement was published on ESMA official website on December 14, 2018. ESMA has imposed more and more regulations not only on binary options but on Forex trading as well and since then, many of the best Forex brokers have been having hard times in the EU.

It is not surprising news for those who have been watching the regulations, as ESMA has previously announced that they were going to renew the prohibitions on binary options from January 2, 2019. At that time, they stated that there still is a significant investor protection concern that is related to the offer of binary options to retail clients. As ESMA claims, protecting the investors is the main motivation of their move and they have carefully considered the need for prolonging the intervention measure.

The new notice reaffirms the conditions of the prohibition, stating that binary options are derivative
that meets the following conditions:
– Unless there is a legitimate reason for default of the payment, the settlement will always be made in cash.
– The payments will always be made at the time of the closeout or the expiry.
– Binary options payment is limited to:
(I) if the underlying of the derivatives meets predetermined conditions, then it is limited to a fixed amount or completely zero
(II) If one or more predetermined conditions are not met then payment is limited to a predetermined fixed amount or completely zero.

Ongoing ESMA regulations

As ESMA enforces regulations on both, binary options and CFDs are repeatedly renewed, it is not clear if the regulations will be over after some time or become permanent in several years from now.
Prohibiting the marketing, distribution or sale to retail clients of binary options was a big change. Binary options have really gained for themselves a bad reputation to all sort of online financial trading areas and therefore many traders think that banning it is a really good idea. However, its positive consequences are under question, as binary options are very likely to relocate outside of the European Union, while still operating within the EU market.

As for FX and CFDs, the restriction is to the marketing, distribution or sale to retail clients of CFDs, including rolling spot Forex. Initially, these regulations should not have been on the market for a long time, but ESMA has expanded the limitations again for another three months starting from February 2019.  It comes with no surprise that these regulations caused a lot of headache and difficulties to brokers since the speculative trading products are popular among retail brokers. Due to the regulations and leverage limits, which vary according to the volatility of each asset class, the market is already struggling. Indeed 2017 and 2018 were a hard time for retail brokers, as it seems for now 2019 will not be any different.

By Matthew Davis

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