With the aim of protecting small investors, the European Securities and Markets Authority (ESMA) has temporarily banned the marketing, trading and selling of binary options.
The decision was made after European national authorities, and in application of the Mifid II directives, identified that binary options are responsible for the highest losses to small investors.
With regard to contracts for differences, known as CFD, the sale will be regulated, imposing new maximum limits on leverage and establishing more stringent requirements.
Triggering the emergency response was a check on investments made by retail accounts.
It emerged that, due to binary options and CFD, small investors had been subject to continuous losses, with a liability of no less than 1600 euros per person, and in some graver cases, 29,000 euros.
Worrying authorities are not just the products themselves, but also those who trade them, as they are regularly in conflict of interest with their customers.
Game over for binary options
The issue of binary options, already the subject of discussion and prohibition in different parts of the world, has been established by the ESMA as an imminent threat to consumer safety.
The temporary halt to the marketing, distribution and sale of binary options in Europe to retail investors is the natural evolution of a global policy that is concerned by the excessive ease of access to products that are similar to gambling, those that have very little likelihood of seeing meaningful financial gain.
The future of the CFD
The first step in protecting consumers from binary option fraud is to make CFD investments less risky. The ESMA is intervening so that losses cannot exceed investments, whilst monitoring the use of financial incentives (or "levers") commonly used in binary option trading.
The new limits of the levers:
- CFDs on Forex Major (exchange rates on major currency pairs): maximum leverage of 30: 1
- Main tokens, gold, cross currency (non-major currency pairs): maximum leverage of 20: 1
- Commodities and non-main stock tokens: maximum leverage of 10: 1
- Equity securities: maximum leverage of 5: 1
- Cryptocurrency: maximum lever of 2: 1.
The ESMA has also established that to avoid crippling losses, accounts that exceed one loss margin will be closed automatically.
In the meantime, traders should continue to proceed with caution as binary option fraudsters continue to aggressively market high return trades.
Always make careful and informed trading decisions, relying on regulated brokers, and being aware of "get rich quick" scams that lurk behind every corner.
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