ESMA binary options only for professional traders

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ESMA: binary options only for professional traders

The European Securities and Markets Authority (ESMA) has agreed on measures on the provision of contracts for differences (CFDs) and binary options to retail investors in the European Union (EU).

The agreed measures include:

1. Binary Options – a prohibition on the marketing, distribution or sale of binary options to retail investors; and

2. Contracts for Differences – a restriction on the marketing, distribution or sale of CFDs to retail investors. This restriction consists of: leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and a firm specific risk warning delivered in a standardised way.

In accordance with MiFIR, ESMA can only introduce temporary intervention measures on a three monthly basis. Before the end of the three months, ESMA will consider the need to extend the intervention measures for a further three months.

Significant Investor Protection Concern

ESMA, along with National Competent Authorities (NCAs), concluded that there exists a significant investor protection concern in relation to CFDs and binary options offered to retail investors. This is due to their complexity and lack of transparency; the particular features of CFDs – excessive leverage – and binary options – structural expected negative return and embedded conflict of interest between providers and their clients; the disparity between the expected return and the risk of loss; and issues related to their marketing and distribution.

NCAs’ analyses on CFD trading across different EU jurisdictions shows that 74-89% of retail accounts typically lose money on their investments, with average losses per client ranging from €1,600 to €29,000. NCAs’ analyses for binary options also found consistent losses on retail clients’ accounts.

These measures were agreed by ESMA’s Board of Supervisors on 23 March 2020.

Steven Maijoor, Chair, said:

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“The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors. The new measures on CFDs will for the first time ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide a risk warning for investors. For binary options, the prohibition we are announcing is needed to protect investors due to the products’ characteristics.

“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.

“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.”

CFDs – agreed measures

The product intervention measures ESMA has agreed under Article 40 of the Markets in Financial Instruments Regulation include:

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.

Next steps

ESMA intends to adopt these measures in the official languages of the EU in the coming weeks, following which ESMA will publish an official notice on its website. The measures will then be published in the Official Journal of the EU (OJ) and will start to apply one month, for binary options, and two months, for CFDs, after their publication in the OJ.

ESMA did not extend the ban on binary options trading in the European Union

July 1, it became known that ESMA ceases its temporary ban on marketing, advertising and the sale of “binary options” for retail customers from the European Union. Definitely, this is a mutual reason for joy for both unprofessional traders and trading platforms from the European Union. Advertising, like the most binary options, was inaccessible to ordinary traders with the EU for a long time. Professional traders had access to the binary options of the EU. But, especially from the latter, they did not hear anything whether there were difficulties and who fell under the classification of professional traders. Many of the platforms, according to the bad tradition that took place in the field of binary options, refused to follow the decree of the regulator. And they were left without a license. Many chased at all. In general, this was not news for the industry, but innocent traders and options have suffered. But, traders who remember the “Israeli stage” of binary options were not very surprised by this turn of events.

What has changed during this time in the binary options industry

Analyzing many other sources of information, we can highlight a positive trend in the field of binary options. Old projects were chipped, not so many new players appeared on the market. Most of them have become more conscientious about their customers (traders). Trading has now become much more relaxed even outside the European Union. The market was redistributed among large companies that occupy leading positions in this industry. It should be noted the growing interest in binary options from Latin America, Indonesia, Thailand, China and other countries of the world. Earlier, the popularity of options was concentrated to a greater extent in the countries of the European Union and the CIS. Now, in the light of recent events, we see a good upward trend in the options market around the world. Many analysts fear deja vu amid past events. But, such a scale as before will not be. Traders have become more vigilant and more careful about choosing a trading platform.

The real situation after the lifting of the ban on binary options in the European Union

First of all, it should be noted that none of the major brokers is in a hurry to return binary options for the EU countries. They were successfully replaced by FX options, which became an alternative for many traders. They did not manage to get wide distribution. Affordable forex options are still available at several major brokers. Some time later, after the ban was officially lifted, we did not notice that trading platforms began again to offer binary options trading to traders from EU countries. We will keep track of this moment in the future. Nevertheless, we hope that after a long pause, binary options will begin to return to the European Union in small steps. In the meantime, there are many other trading tools that have managed to replace options for many traders during their absence. The long return of binary options to the European Union is also evidenced by the low interest of potential traders in search engines. All these factors influence the return of many beloved trading instruments to Europe by many.

ESMA is watching you

The official lifting of the ban on binary options has not caused much excitement, as many expected. Everyone knows the cool temper of this regulator. First, hold the toy in your hands, and then pick it up. In its official publication, ESMA made it clear that it will continue to monitor this trading instrument and tighten control over it. Such a trial period, which is not defined by the time frame. What will happen from this – directly depends on binary options brokers. To be honest, from the good faith of the latter. If everything goes well, then binary options have a very good chance to return with new forces to the European market. Will it be? It all depends on brokers to a greater extent and the awareness of most traders. With their increased vigilance to brokers, fraudsters will find it very difficult. Their life cycle will become very short. With the assistance of ESMA, we will get a good bunch to limit the influence of such companies on the authority of a trading instrument.

Conclusion

I would like to note a positive trend in all of the above. After all, we will witness a new stage in the development of binary options as a trading tool. If everything goes smoothly and in the EU, trading platforms will return binary options for trading to ordinary traders. And, this will not cause negative consequences, the growth and popularity of this trading instrument will increase significantly. And, as it really will be, time will tell. Follow binary options with us. We have a lot of useful information on the site. See you in new publications.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

ESMA: binary options only for professional traders

The European Securities and Markets Authority (ESMA) has formally adopted new measures on the provision of contracts for differences (CFDs) and binary options to retail investors.

The measures have been published in the Official Journal of the European Union (OJ) today. They will start to apply from 2 July 2020 for binary options and from 1 August 2020 for CFDs and will apply as follows:

1. Binary Options (from 2 July 2020) – a prohibition on the marketing, distribution or sale of binary options to retail investors; and

2. Contracts for Differences (from 1 August 2020) – a restriction on the marketing, distribution or sale of CFDs to retail investors. This restriction consists of: leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and a firm specific risk warning delivered in a standardised way.

ESMA has adopted these measures in the official languages of the EU and they will remain in force for a period of three months from the date of application.

Steven Maijoor, Chair, said:

“The measures ESMA has taken today are a significant step towards greater investor protection in the EU. The new measures on CFDs will, for the first time, ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide understandable risk warnings for investors.

“ESMA’s prohibition on the marketing, distribution or sale of binary options to retail investors addresses the significant investor protection concerns caused by the characteristics of this product.

“This pan-EU approach is the most appropriate way to address this major investor protection issue. NCAs will monitor the impact of these measures during their application and will assess, with ESMA, what next steps are required.”

CFDs – measures from 1 August 2020

The product intervention measures ESMA has adopted under Article 40 of the Markets in Financial Instruments Regulation include:

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.

Next steps

MiFIR gives ESMA the power to introduce temporary intervention measures on a three monthly basis. Before the end of the three months, ESMA will review the product intervention measures and consider the need to extend them for a further three months.

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