EU extends ban on selling binary options to retail clients.
- Reclaws International (Reclaws.com)
Europe’s financial regulator has said it will extend a temporary ban on speculative products popular with retail traders known as binary options, as it continues to wield its new “emergency intervention” powers.
The European Securities and Markets Authority said on Friday that it would renew a three-month “prohibition of the marketing, distribution or sale” of binaries to retail traders, which came into force in July, for another three months starting on October 2.
Binaries are leveraged bets on whether financial indices such as the price of gold or the FTSE 100 will rise or fall over a fixed period, sometimes as brief as 30 seconds. The initial ban constituted Esma’s first use of emergency “product intervention” powers, afforded to it in January under new MiFID II markets rules.
The continent-wide move came as concern grew that big losses were being incurred on complex products, which are typically marketed online as “get-rich-quick” schemes, while police have uncovered numerous scams linked to them.
Still, some have questioned whether the ban is an appropriate use of its new Mifid powers. But Esma said on Friday that it “considers that a significant investor protection concern related to the offer of binary options to retail clients continues to exist”.
As part of a broader clampdown on the online trading industry, Esma has also introduced restrictions on similar products known as contracts-for-difference, including curbs on the number of leverage providers can offer to retail customers. Those rules came into force in August and Esma is yet to state whether it will renew them from November.
Data show that between 74 and 89 percent of European retail accounts trading CFDs tend to lose money, with losses ranging between €1,600 and €29,000. Similar data is not available for binaries.
The regulatory crackdown is expected to hurt the profitability of large listed online trading platforms such as IG Group and CMC Markets, but also the wealth of smaller private operators that have sprung up across Europe.
However, the watchdog said on Friday that it had decided to exclude from the scope of the ban two types of binary product that was “less likely to lead to a significant investor protection concern”. These are longer-term binaries with a prospectus that are fully hedged by their provider, or binaries where the potential payout is at least equal to the initial investment.
Esma has the power to renew its three-month ban again if it feels national regulators have not taken sufficient action to protect investors.
Jake Green, the financial regulatory partner at law firm Ashurst, said: “This was expected and the CFD measures will surely follow suit. The industry will be seeing what attempt, if any, is made to make such a ban permanent.”
Separately, both Google and Facebook announced bans on adverts for binaries earlier this year.