Potential product intervention measures on contracts for differences and binary options to retail clients.
Yesterday, the 18th January, ESMA, the European Securities and Markets Authority, issued a ‘Call for evidence’. Interested parties are invited to comment on the potential changes to the regulation of the CFDs and binary options markets. The document can be found at ESMA Call for evidence.
One of the most interesting features of the document is that they provide a definition of what a binary option is. This definition is an exposition of how European regulators view binary options. It is, arguably, the first time a regulator has actually provided specific detail on what a binary options is.
A BO is a derivative that meets the following conditions:
- it must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event;
- it only provides for payment at its close-out or expiry;
- its payment is limited to:
(i) a predetermined fixed amount if the underlying of the derivative meets one or more predetermined conditions; and
(ii) zero or another predetermined fixed amount if the underlying of the derivative does not meet one or more predetermined conditions.
c. provides an interesting development. Binary options that are regulated have required just the two settlement prices. This has meant that businesses have had to choose between the call or the put as to which one is considered the winner. In the event of the underlying asset price settling exactly on the strike, in other words, settles at-the-money (ATM) does the call or the put win? So, if the binary option is specified as settling at 0.5 (or 50) when the option expires at-the-money does this preclude it from becoming a binary option? Is the instrument a new kind of CFD, a CFD which has limited profit AND loss? Interesting………….