In the past few years, binary options have become a popular trading method. The traders of different regions like Europe, Asia, and other places show a great interest in binary options as this trading is based on a simple proposition of yes or no.
This all-or-nothing trading method is one of the easiest ways of making money. It’s easy because traders only have to predict the price movement of the selected asset. If they speculate the price movement correctly, they win. Otherwise, they lose all of their invested money.
Although binary options trading sounds easy and its concept is not complicated, there is a risk. The danger lies in the probability of losing money. It’s just that predicting the price movement of an asset is not easy. Additionally, the volatile nature of the binary options market makes things even more difficult.
That’s why after seeing the risk of options trading and considering other factors, ESMA, European Securities and Marketing Authority, has placed a temporary ban on binary options trading.
But what is ESMA ban? What is its downside? How has this ban affected traders in European Union? And how can this ban be avoided while trading binary options from the EU? We’ll answer all of these questions and more in this comprehensive guide.
Binary Ban Explained
European Securities and Marketing Authority is a supranational European organization. It examines the financial market and contributes to the financial system’s safety by increasing the inventor’s protection.
On 2nd July 2018, ESMA decided to ban binary options trading in the European Union temporarily. The organization imposed this ban because its members noticed that the number of binary options traders in the Europen region has increased.
Moreover, the organization also saw that several people did not understand how binary options trading is done. Also, people were facing difficulty in learning withdrawal and deposit methods and analyzing the options market. Hence, they were losing money.
That’s why European Securities and Marketing Authority decided to put a temporary ban on sales and distribution of binary options for three months. On 2nd October 2018, ESMA renewed the ban by excluding a few assets from trading.
However, the organization once again imposed a ban on binary options trading. European Securities and Marketing Authority has formally stopped marketing, sales, and distribution of CFDs for binary options trading.
Since the ESMA organization implemented the binary options ban, it has been extended a couple of times.
- The first temporary ban was from 2nd July 2018 to 2nd October 2018.
- ESMA imposed a second ban from October to 1st January 2019.
- The third ban started in January and lasted till 1st April 2019.
- Again on 18th February 2019, European Securities and Marketing Authority banned binary options trading.
How Binary Options Ban is Affecting Traders?
After ESMA imposed the binary options ban, the binary options traders have been facing some challenges. Traders with no professional status can no longer use high leverage and trade binary products.
Although European Securities and Marketing Authority is trying to protect the European traders by imposing a ban, it has taken away a certain amount of financial freedom.
Additionally, traders are dealing with a black and white situation. That’s because even if binary options cannot be sold, bought, or traded, there are a few relaxations given to traders. The relaxation is given by excluding some forms of binary options from the ban.
But there is a catch- even after ESMA has excluded certain kinds of binary options from the ban, it’s almost impossible to make enough money from the options trading. That’s because traders can’t implement these relaxations effectively without going bankrupt.
Here are some forms of binary options that are excluded from the ban:
The first case says that “for binary options, the lower value of two predetermined amounts should be equal to the total payment made by the client. This payment also includes transaction fees, commission, and other relevant costs.”
In simple terms, this condition means for a given trade, you will get your entire payment back as the worse outcome. The other result says that you can win a whole payout.
Making a profit from this binary options situation is like spotting a white unicorn. That’s because this situation is extremely difficult to happen.
The second exception includes three conditions that binary options must meet.
- The expiry time of an asset must be 90 days from the calendar.
- A prospectus drawn up and approved under 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. The provider or any of its group entities do not profit or lose from the binary option, other than previously disclosed commissions, transaction fees, or additional related charges.
So, if you want to trade binary options in the European region, you need to choose one of these two binary options forms that are excluded from the ban.
How Can You Avoid The Ban?
Are you wondering whether you can avoid the ban on binary options trading? Well, you can avoid the ban. If you want to continue doing options trading from within the EU, you can follow one of the following ways that are mentioned below.
You can look for an unregulated broker that still accepts EU traders. However, you should not try this method for trading as it is risky and can make you lose a great amount of money.
Unregulated brokers are more likely to scam traders. Sadly, the binary options trading ban has no control over the scam as it’s done outside the law.
Use a Professional Account
You can legally trade binary options in European Union by registering yourself as a professional trader. To assess a professional account, you must prove a certain amount of trading capital (500k) and a certain amount of trading experience (2 years).
Once you have proved your trading experience and capital, you are no longer bound by the ESMA ban. But this also means that you are taking full responsibility for the financial risk you might face while binary options trading.
After getting a professional account, you can lawfully trade with a binary options broker again. That means you can trade CFDs and forex without any worry.
If you don’t have enough trading experience and trading capital, you can’t use a professional account. However, you can trade alternate products that reliable brokers have designed.
The alternative products are designed to fill the gap created by the ESMA ban. Some of the alternate products are FX Options by IQ Option and knock-outs by IG. Although these products are not binaries, they have certain traits of binaries.
When trading alternate products, remember that European Securities and Marketing Authority is closely watching these alternate product’s trading. And if they find any risk, they might ban these products as well.
The last way you can trade binaries from within European Union is by finding a broker with its branch in a region other than Europe. For doing this, you must do thorough research.
Non-EU branches of a company based in Europe can be anywhere, say Malaysia, Australia, or some other place. As a retail trader, you can request an account from any of the non-EU branches of a broker.
ESMA will only allow the process if the trader initiates the request for such an account and not the broker. If any company tries to promote itself, European Securities and Marketing Authority can reprimand them.
After your request for opening a trading account with a Non-EU branch has been approved, you can get assess to binary options trading.
To trade binary options from within Europe, you need a European broker on your side due to the ESMA rule. If you follow one of these ways, neither will you flout the ESMA rule nor will you land in any legal complication.
The Future of CFD
For making the options trading less risky and more profitable, ESMA has reshaped the CFD market by making a few changes. It has limited the amount of leverage commonly used in the binary options market.
- 30:1 for major currency pairs.
- 5:1 for individual equities and other reference values.
- 20:1 for non-major currency pairs, gold, and indices.
- 2:1 for cryptocurrencies.
- 10:1 for commodities other than major indices and gold.
European Securities and Marketing Authority has banned binary options trading because several people were facing difficulty understanding the withdrawal and deposit process and other aspects of binary options trading.
But you can still trade binary options from within European Union by following one of the four ways mentioned above. These choices have made it possible for traders to invest their money in one of the most volatile trading markets without breaking the law.
It’s advised not to look for any unregulated broker as trading with such a firm is risky, and you might end up losing a considerable amount of money.