Binary Options trading has been quite popular in the past, with a large part of the traders amassing fortunes by making substantial profits. The term “Binary Options” refer to a class of financial products, in which the buyer can either receive a payout or lose his/her investment, based on the expiration of the option.
The term “binary” comes from the fact that it depends on the outcome of either a yes or no proposition. In other words, the price of the underlying asset must fall on the correct side of the strike price before the binary option expires. The gain or the loss of the trade is automatically debited or credited to the trader’s account upon expiry.
Changes Due to ESMA Regulations in Europe
In the EU, the European Securities and Markets Authority (ESMA) has prohibited marketing, distribution and sale of binary options to retail investors since July 2018. This ban was originally expected to be temporary for a three-month period, with a future possibility of renewal.
The existence of an overwhelming number of frauds linked to binary options was said to influence the ESMA’s decision. However, they instead decided to halt the supply and marketing of binary options in the EU, rather than evaluating and prosecuting the individual scams. The aim behind this move was to protect customers and deluge the overwhelming number of complaints that they received over the last decade.
Since the original ruling, the ESMA has extended the ban on binary options with all the related restrictions in place. The extension of the ban is explained in the following points below on a chronological basis.
- Initially from the 1st July to 1st October 2018.
- Extended further from the 1st of October 2018 to 1st January 2019
- Further Extended till 1st April 2019
- Ban extended to 1st June 2019
- Ban in Still in place as of 2020
However, during this period the ESMA has failed to conduct proper research into the long-term effects of this ban.
The Situation in Europe Today
Currently, the situation in Europe when it comes to binary options trading is black and white, with little room for interpretation. Under existing laws, the marketing, selling and distribution of binary options to retail clients is outlawed and illegal inside the European Union.
However, that has not stopped EU based traders from accessing binary options trading even today. There are various ways in which EU based traders avoid the ban, some of which are mentioned below.
- Trading With Non-EU branches of binary brokers: Traders in EU can still access binary options trading with binary brokers outside the European Union’s jurisdiction. For instance, traders can choose brokers such as Pocket Option, Finmax or Spectre.ai. All these brokers are regulated by non-EU regulatory bodies. As a result, the brokers do not have to comply with ESMA restrictions and can provide binary options trading to EU based users.
- Using Professional Accounts: The option of opening a professional account may be available to traders meeting a certain criteria. Traders who sign up for professional accounts must give a declaration that they are experienced enough to understand the high degree of risks associated with products such as binary options and choose not to be under any regulatory protection. The ESMA implements its ban on retail traders and not on professional traders. Traders who open professional accounts have access to Forex trading and CFD trading as well, with higher leverage options, without any regulatory protection.
The assumption that “binary options trading is dead” can easily be dismissed if we look at the bigger picture. While it is true that ESMA restrictions had initially affected binary options trading, traders have looked at other ways to continue trading as before. Currently, traders can circumvent the ban and restrictions as mentioned above, or trade with brokers operating outside of the EU’s jurisdiction.