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Regulation

ESMA Renews Banning Binary Options and Continues Restriction on CFDs

Redwan Eid | Oct. 1, 2018
ESMA Renews Banning Binary Options and Continues Restriction on CFDs

The European Securities and Markets Authority (ESMA), has published today on its website, the notice of ESMA’s product intervention renewal decision in relation to binary options.

The notice details the decision that falls under Article 40 of Regulation (EU) No 600/2014 to prohibit the marketing, distribution or sale of binary options to retail clients, which ESMA adopted on the 21st of September this year.

In accordance with Article 40(5) of Regulation (EU) No 600/2014, the document states the details of the prohibition in relation to binary options as follows:

The enacting terms of the Decision provide:

Article 1

Temporary prohibition on binary options in respect of retail clients

1. The marketing, distribution or sale to retail clients of binary options is prohibited.

2. For the purposes of paragraph 1, irrespective of whether it is traded on a trading venue,

a binary option is a derivative that meets the following conditions:

(a) it must be settled in cash or may be settled in cash at the option of one of the

parties other than by reason of default or other termination event;

(b) it only provides for payment at its close-out or expiry;

(c) its payment is limited to:

(i) a predetermined fixed amount or zero if the underlying of the derivative

meets one or more predetermined conditions; and (ii) a predetermined fixed amount or zero if the underlying of the derivative does not meet one or more predetermined conditions.

3. The prohibition in paragraph 1 does not apply to:

(a) a binary option for which the lower of the two predetermined fixed amounts is

at least equal to the total payment made by a retail client for the binary option,

including any commission, transaction fees and other related costs;

(b) a binary option that meets the following conditions:

(i) the term from issuance to maturity is at least 90 calendar days;

(ii) a prospectus drawn up and approved in accordance with Directive

2003/71/EC is available to the public; and

(iii) the binary option does not expose the provider to market risk throughout the term of the binary option and the provider or any of its group entities do not make a profit or loss from the binary option, other than previously disclosed commission, transaction fees or other related charges.

Article 2

Prohibition of participating in circumvention activities

It shall be prohibited to participate, knowingly and intentionally, in activities the object

or effect of which is to circumvent the requirements in Article 1, including by acting as

a substitute for the binary option provider.

Article 3

Entry into force and application

1. This Decision enters into force on the day following that of its publication in the Official

Journal of the European Union.

2. This Decision shall apply from 2 October 2018 for a period of 3 months.

Restriction on Marketing Distribution for CFDs Continues

In a similar context, ESMA has also agreed to renew the restriction on the “marketing, distribution or sale of contracts for differences (CFDs) to retail clients”.

The Paris-based regulatory body confirmed on its website, that the renewal of the decision which was in effect since 1 August, will start on 1 November 2018, for a three-month period, stating the following provisions:

Renewal of restriction on CFDs

The renewal was agreed by ESMA’s Board of Supervisors on 26 September 2018 and includes renewing the following:

1. Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying:

30:1 for major currency pairs;

20:1 for non-major currency pairs, gold and major indices;

10:1 for commodities other than gold and non-major equity indices;

5:1 for individual equities and other reference values;

2:1 for cryptocurrencies;

2.   A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs;

3.   Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;

4.   A restriction on the incentives offered to trade CFDs; and

5.   A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

According to ESMA’s website: “The new warning will be allowed only in cases where the standard terms of a third party marketing provider have a character limit which is lower than the number of characters comprising the full or the abbreviated risk warning, provided that the advertisement also links to a webpage of the provider on which the full risk warning is disclosed.”.

ESMA referred to that it agreed to renew an additional “reduced character risk warning”, due to the technical difficulties CFD providers experienced in using the risk warnings, because of the character limitations imposed by third party marketing providers.

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