The ESMA Ban – And How To Continue Trading

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The ESMA Ban – And How To Continue Trading

ESMA Extends Ban On Binary Options

The ESMA ban on binary options has been extended again, and in all likelihood, the ban is likely to remain in place indefinitely. So with a blanket ban on the marketing and sale of binary options in Europe, is there anything traders can do to continue trading? Possibly…

How The Binary Options Ban Is Affecting Traders

Starting July 2020, the European Securities and Markets Authority (ESMA) has prohibited the marketing, distribution or sale of binary options to retail investors. The ban was and still is temporary, for a 3 month period, with the possibility of renewal when said period is up.

Since then, ESMA has constantly renewed the ban, and have announced they will do so again when the current period is up, on the 2nd of January 2020. The Authority will probably continue to renew this measure indefinitely, so EU customers are not likely to trade Binary Options anytime soon, at least not with regulated brokerages.

Currently we are dealing with a black and white situation, without much room for interpretation: binary options cannot be marketed, sold or distributed to retail clients. Actually there’s a “but” somewhere in there because ESMA has decided to exclude from the ban some forms of Binary Options.

However, as you will find out next, these exceptions are almost impossible for the brokers to implement while still making enough money to avoid bankruptcy.

Exception 1: “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

That’s a White Unicorn if I ever saw one. It basically means that on any given trade the worst outcome is you get your money back, including all commissions and fees. The other outcome is to win the entire payout. Looking forward for any brokerage implementing such a binary option but I won’t be holding my breath!

Exception 2: A binary option that meets the next three conditions cumulatively:

  • expiration time of at least 90 calendar days
  • a prospectus drawn up and approved in accordance with the Prospectus Directive (2003/71/EC) is available to the public
  • 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 commissions, transaction fees or other related charges”.

While the first 2 conditions are pretty straightforward, the last one may need a bit of clearing up: the brokerage should have no interest in the outcome of the trade. In other words, the old conflict of interests where the brokerage would make money when you lose a trade should completely go away.

Remember that all three conditions are cumulative, so it will be extremely difficult for a brokerage to implement them all at once and to make this type of binary option both lucrative for them and appealing to traders.

Avoiding The Ban

In short, yes. There are some viable ways to continue trading. One choice we are not going to expand on is using unregulated brokers – this is high risk and fraught with danger, to the point where it should not even be considered. One downside to the ban, is that it does nothing to address the scams. They operated outside of the law anyway, this ban will not change their behaviour (It may even embolden them as they know the European regulator has no appetite to chase them). Only use regulated brokers. So with that said, let us move on to some genuine ways you can carry on trading;

Going Professional

This choice will only be open to certain traders. You need to prove a certain amount of trading experience, and trading capital. Assuming you can, then you can register as a professional trader. This makes you exempt from the ESMA rule changes (You are no longer a ‘retail’ investor). Brokers can lawfully offer you binary options again. The downside is that you sign away any regulatory protection. You are basically saying you are financially aware enough to use high risk products. It is a great choice for experienced traders and indeed, many have already taken this step to continue trading just as they were.

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Alternative Products

Many brokers have created similar products to binaries, but made them different enough to dodge the ban. These include FX Options and Knock Outs. Expect more to follow. While not strictly binaries anymore, many of the same strategies will work. One note of caution however, is that ESMA are watching these products closely. If they feel the ban is being flouted, they may insist the new products are removed too.

Enquire With Your Broker

This option needs some detective work. Many brokers have multiple regulated ‘arms’ all under the one brand. For example, they may have a European based company, regulated in Europe, and another company registered in Australia or Malaysia to service each market. As a retail trader, you are able to request an account with one of the other ‘offshore’ or non-european companies, but with the same brand.

ESMA will allow European traders to trade under a different arm of the same brand – as long as the request came from the trader – the brand themselves are not allowed to market this as an option for their customers. ESMA have already reprimanded a couple of brands for trying. But as long as the request comes from you, the trader, then it is ok for the broker to facilitate that change for you. Once operating under another regulated arm of the business, you can access binaries again.

So get the deerstalker on and see if your broker has regulated branches in different jurisdictions.

Conclusion

So with these choices, it is possible to carry on trading, possibly without even leaving your current broker. There is also absolutely no need to look at unregulated firms. So the ban on binary options does not have to mean the end of your binary trading.

The ESMA Ban – And How To Continue Trading

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:

“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.

The ESMA Ban On Binary Options, Why Traders Don’t Care

We Knew It Was Coming, And We Don’t Care

The ESMA followed through with its plans to ban binary options within the EU. The regulator, acting the interests of consumers, have issued a blanket ban on all brokers, trading and options with a limited time frame and all-or-nothing payout. According to the press release, the ESMA concluded that there posed a significant risk to public safety that needed to be addressed and we applaud them on the efforts. They want to protect unwitting investors from getting scammed by one of the many frauds that have plagued binary options. Too bad they didn’t do something about it sooner, maybe they could have saved a fun way to trade.

  • According to data used by the ESMA to make their decision roughly 80% of all CFD and binary options trading accounts lose money. Losses range from $1000 up to $30,0000 on average.

The Alternative – CFD Trading

Regardless, we don’t really care about the ban because of one thing, even good binary options pale when compared to CFD trading. Any trader who can make money consistently with binary options knows they could make even more money with a CFD. Binary options limit the risk but they also limit the gains, not taking into consideration the trouble with expiry. Choosing the right expiry for a binary options is very difficult. Traders using CFDs can employ stop-losses to limit risk and make open-ended profits provided the asset keeps moving in the direction of choice.

Traders should be aware that the ESMA’s new regulations include restrictions on CFD trading. They have curtailed marketing of CFDs to help control out-of-control marketers and their get-rich-quick schemes. Hopefully it works but I’m sure the marketers will come up with some new way to get the suckers. The ESMA has also put a limit on the amount of leverage you can use, no more than 30X, as well as requiring negative-account and margin-call protections to limit the amount of losses a trader is allowed to rack up.

Regardless, CFDs remain the better choice, and for now, the only choice for traders looking to trade with a broker based in Europe. Another option, no pun intended, are ladder-style options like what you find at NADEX and IGMarkets and some other brokers. I hope to see the ESMA back off the binary options ban once the scams and fraud have died down but I’m not holding my breath.

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