On October 1, 2018, following its announcement in August 2018, ESMA published notice of the extension of the prohibition on the marketing, distribution and sale of binary options to retail investors for a further three- month period from October 2, 2018. ESMA is extending the ban because the threat to investor protection has not been addressed yet through a change in EU legislation and national regulators have either taken no action or have taken insufficient action to address the potential harm.
ESMA has powers under Markets in Financial Instruments Regulation to impose prohibitions or restrictions on certain financial instruments, financial activities or practices to address a significant investor protection concern in the Union. Product intervention measures imposed by ESMA under MiFIR must be reviewed at appropriate intervals and at least every three months. If a measure is not renewed after three months, it will expire and it would then fall to member states to impose similar restrictions at a national level, if they so wish.
ESMA adopted two temporary product intervention Decisions in June this year, one relating to binary options and another to Contracts for Difference. ESMA recently announced that its various restrictions on the sale, distribution and marketing of CFDs to retail investors will be extended from November 1, 2018 for a further three months and its Decision is due to be published in the Official Journal of the European Union before the initial measure expires.
ESMA has considered evidence to the effect that certain binary option products are unlikely to lead to investor detriment. As a result, the renewed ban does not apply to 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;
- 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 under the Prospectus Regulation 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.
The U.K. FCA is expected to consult before the end of 2018 on whether to make permanent in the UK the EU's temporary prohibition on marketing, distribution and sale of binary options to retail investors.
The ESMA's Decision is available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018X1001(01)&from=EN and the ESMA's announcement on extending the CFD measures is available at: https://finreg.shearman.com/EU-Contracts-for-Difference-Product-Intervention-.
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