The European Securities and Markets Authority is an organization that is tasked with “safeguarding the stability of the European Union’s financial system by enhancing the protection of investors and promoting stable and orderly financial markets.” In order to achieve this, the organization issues a rulebook to be followed by EU financial markets. Furthermore, it coordinates the behavior of regulators across various territories.
In July, the organization introduced a prohibition on marketing, distribution and sale of binary options to retail customers. According to a recent press release, the prohibition will be extended to three more months. In addition to the extension, there are some changes made to the list of prohibited products. “ESMA has carefully considered the need to extend the intervention measure currently in effect. ESMA considers that a significant investor protection concern related to the offer of binary options to retail clients continues to exist. It has therefore agreed to renew the prohibition from 2 October,” – said the statement released on the organization’s website.
ESMA excludes select products from the scope of measure
The organization listed several reasons and criteria for considering certain products safer for the investors, thus excluding them from the scope of measure. As the statement explains, there are some binary options that are “sufficiently long-term” in order to reduce the risks for the investors. These options usually have a term of over 90 days. In addition to this, the options have to be accompanied by a well-developed prospectus. A third condition is that the option has to be hedged by the provider i.e. “the binary option [should] not expose the provider to market risk throughout the term of the binary option and the provider or any of its group entities [should] not make a profit or loss from the binary option, other than previously disclosed commissions, transaction fees or other related charges.” If the product satisfies these three conditions, it is considered not as risky for the investor by ESMA.
In addition to these three conditions, there is another instance which might lead the ESMA to exclude a product from the scope of measure. “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 commissions, transaction fees and other related costs” will also be excluded from the scope of the renewal. This means that the investor is guaranteed not to lose on the investment. Although there might not be many products that will satisfy the latter condition, it is still considered by the authorities in the renewal of the regulation.