The European Securities and Market Authority (ESMA) made headlines in 2018 with several substantial legal changes in European traded markets.
Among these was the introduction of a law banning the trading of binary options, which remains intact today. Learn more about this significant intervention and ways to navigate it.
Key Facts About ESMA’s Binary Options Ban
- Due to their speculative nature, the European Securities and Market Authority (ESMA) banned the trading of binary options in the European Economic Area (EEA) in July 2018.
- ESMA’s ban on binary options was implemented to protect retail investors from high-risk and complex financial products.
- The ESMA ban does not apply to traders classified as ‘professional,’ who can still trade in binary options under certain conditions.
- Traders in EEA countries can legally bypass the ban by trading alternative options or using regulated non-EEA brokers.
- Despite the ban, some non-EEA countries still allow binary options trading, offering alternatives for interested traders.
Why Did ESMA Ban Binary Options?
ESMA followed the Markets in Financial Instruments Directive 2014, or MiFID II, which they implemented on 3 January 2018. The early to mid-2010s was already a period of high-risk, speculative trading and scams or fraudulent behavior.
According to ESMA at the time, “The combination of the promise of high returns and easy-to-trade digital platforms in an environment of historically 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.”
Unfortunately, many see binary options as riskier than standard CFD trading and akin to gambling. Also, several regulatory experts saw the conflict of interest with brokers who benefitted directly from their clients’ losses.
ESMA officially announced a three-month ban on binary options, effective 01 July 2018. Binary options under certain conditions were excluded from the ban. Moreover, the initial restriction applied to clients deemed retail instead of professional.
ESMA renewed its three-month bans in October 2018, January 2019, and April 2019. It temporarily lifted the ban in July 2019. However, the prohibition remains until today.
Avoiding the ESMA Ban on Binary Options:
EEA-based traders keen on binary options have struggled since ESMA’s monumental ban in 2018. Participants were quick to seek offshore unregulated brokers as a solution. It does seem like a viable way to avoid ESMA’s law. Yet, it carries the most risk and is not recommended for the average trader.
Fortunately, there are ways of legally avoiding the restriction.
These brokers are available without ESMA regulation:
- Welcomes International Clients
- Offers High Payouts: 90% – 97%+
- Professional-grade Platform
- Swift Deposit Process
- Enables Social Trading
- Provides Free Bonus Incentives
- High bonus
- Free gifts
- Accepts international clients
- Userfriendly platform
- Copy trading
- Welcomes International Clients
- Offers High Payouts: 90% – 97%+
- Professional-grade Platform
- Swift Deposit Process
- Enables Social Trading
- Provides Free Bonus Incentives
- High bonus
- Free gifts
- Accepts international clients
- Userfriendly platform
- Copy trading
Trading Alternative Options and Markets
The options market extends beyond binaries. You can consider vanilla (or standard) options or exotic ones like knockouts, turbos, and FX options. Luckily, a few EEA-regulated brokers exist for these options, such as IG, CMC Markets, and Saxo.
Alternatively, traders may venture into CFD trading in Europe despite the reduced leverage. One advantage of speculating in CFDs is that the risk-to-reward ratio is much higher than that of binary options, yet the former is more complex.
Considering Non-EEA Brokers
Large brokers like those mentioned previously are regulated in multiple regions outside the EEA. These usually include Switzerland, Dubai, South Africa, Singapore, and Japan. As a retail trader, you can request an account with an EEA broker through some of their non-EEA subsidiaries where binary options are legal.
Since the ban, ESMA has reprimanded a few brokers who have publicly recommended this method. However, it is legal when you request it. Of course, there will be different requirements for registering under a foreign entity. Still, it’s an option worth exploring to trade binary options.
Going ‘professional’
As mentioned earlier, the ban on binary options was applied to retail clients or, in simple terms, the everyday trader. However, those classified as ‘professional’ can still trade binary options with certain EEA-regulated brokers.
Still, this route is more exclusionary or comes with a higher barrier to entry. Many brokers will consider factors like:
- Number of ‘significant’ trades over a certain period.
- Number of years of working experience in the financial industry.
- Experience with complex trading instruments.
- Trading capital in the six-figure range.
Our Tip For Binary Traders:
(Risk warning: Your capital can be at risk)
Will the Binary Options ESMA Ban Be Lifted in The Future?
Sadly, ESMA has kept mum on its initial 2018 ban and hasn’t communicated any changes to the restriction since July 2019. Thus, it’s safe to assume that the overseer will continue prohibiting binary options until further notice.
Bottom Line
ESMA certainly put a spanner in the works in 2018 for European traders who traded binary options hassle-free. While an inconvenience, the ban does reaffirm the highly risky nature of this trading. This is why most should avoid the easy route of using an unregulated trading platform.
Thankfully, there are safer alternatives, such as trading alternative options and CFDs, registering with regulated non-EEA brokers, and getting ‘professional’ status.
Most Asked Questions:
What prompted ESMA to ban binary options in the EEA?
ESMA banned binary options in the European Economic Area (EEA) in July 2018 due to their highly speculative and risky nature, aiming to protect retail investors from significant financial losses.
Are there any exceptions to the ESMA ban on binary options?
Yes, the ban primarily applies to retail clients. Traders classified as ‘professional’ can still trade binary options under certain conditions with EEA-regulated brokers.
Can EEA traders still engage in binary options trading legally?
EEA traders can legally trade binary options by considering alternatives, using regulated non-EEA brokers, or attaining professional trader status.
What are the risks of using unregulated offshore brokers to trade binary options?
Using unregulated offshore brokers carries significant risks, including the potential for fraud, lack of legal recourse, and the possibility of substantial financial losses.
How can traders attain ‘professional’ status to bypass the binary options ban?
Traders can achieve ‘professional’ status by meeting criteria such as having a substantial trading history, working experience in the financial industry, and maintaining a high trading capital.
Will ESMA lift the binary options ban in the future?
Currently, ESMA has not communicated any changes to the ban since July 2019, making it unlikely that the restriction will be lifted soon.
