Esma bans binary options and restricts sale of CFD’s to retail investors
EU markets regulator Esma will prohibit the sale of binary options to retail investors and restrict the distribution of contracts for difference (CFDs), in a bid to protect consumers from market risks.
The European Securities and Markets Authority (ESMA) said that due to the complexity and lack of transparency for both instruments, there existed a “significant investor protection concern.”
Binary options offer investors the payoff of either a fixed monetary amount or nothing at all. CFD’s provide an opportunity to bet on price changes of an asset without having to own it.
“The combination of the promise of high returns, easy-to-trade digital platforms, in an environment of historical low interest rates has created an offer that appeals to retail investors. However, the inherent complexity of the products and their excessive leverage – in the case of CFDs – has resulted in significant losses for retail investors” Esma warned.
“A pan-EU approach is required given the cross-border nature of these products, and ESMA’s intervention is the most appropriate and efficient tool to address this major investor protection issue” the regulator stated.
Based on article 40 of the revised Mifid directive which entered into force at the beginning of the year, Esma has been granted intervention powers to temporarily restrict the distribution of investment products. While Esma’s powers to restrict product distribution and marketing are limited to a period of three months, it can subsequently renew the ban. Compliance with Esma’s ban will be mandatory in all member states.
The ban on binary options will be effective one month after being published in the Official Journal of the EU, the restrictions on options apply two months after publication in the Journal.