knowledge | 10 July 2019 |

The Central Bank, Binary Options and CFDs

The Central Bank of Ireland has adopted two new product intervention measures which, respectively: ban the marketing, distribution or sale of binary options; and restrict the marketing, distribution and sale of contracts for difference (CFD), to retail clients in or from Ireland. Each of the measures is intended to replace earlier temporary product intervention measures adopted by ESMA and are taken pursuant to Article 42 of Regulation 600/2014 (“MiFIR”).

Binary Options

The prohibition on the marketing, distribution and sale of binary options is set out in the Central Bank of Ireland Binary Options Intervention Measure pursuant to Article 42 of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 12 June 2019 (the “Binary Option Measure”) (here). For the purpose of the prohibition, the term “binary option” is defined to mean a derivative:

  • that must be cash-settled or may be cash-settled at the option of one of the parties other than by reason of default or other termination event;
  • only provides for payment at its close-out or expiry; and
  • the payment is limited to:
    • a predetermined fixed amount or zero if the underlying of the derivative meets one or more predetermined conditions; and
    • a predetermined fixed amount or zero if the underlying of the derivative does not meet one or more predetermined conditions.

The prohibition does not apply to a binary option:

  • for which the lower of the two predetermined amounts is at least equal to the total payment made by the retail client for the binary option, including any commission, transaction fees and related costs;
  • that meets the following conditions:
    • the term from issuance to maturity is at least 90 calendar days;
    • a prospectus drawn up and approved under the Prospectus Directive 2003/71 or the Prospectus Regulation 2017/1129 is available to the public; and
    • 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 commission, transaction fees or other related charges.

The Binary Options Measure took effect on 2 July 2019. It replaced ESMA’s temporary product intervention measure prohibiting the sale, distribution or marketing of binary options, which was set out in Decision 2019/509, and which expired on 1 July 2019.

CFDs

The restrictions on the marketing, distribution and sale of CFDs is set out in the Central Bank of Ireland Contracts for Difference Intervention Measure pursuant to Article 42 of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 12 June 2019 (the “CFD Measure”)(here).

The CFD Measure restricts the marketing, distribution or sale to retail clients of CFDs in or from Ireland to circumstances where the CFD provider at least:

  • requires the retail client to pay the initial margin protection prescribed by the CFD Measure;
  • provides the retail client with the margin close out protection prescribed by the CFD Measure;
  • provides the retail client with the negative balance protection prescribed by the CFD Measure;
  • does not directly or indirectly provide the retail client with a payment, monetary or excluded non-monetary benefit in relation to the marketing, distribution or sale of a CFD, other than the realised profits on any CFD provided; and
  • does not send directly or indirectly a communication to or publish information accessible by a retail client relating to the marketing, distribution or sale of a CFD unless it includes the appropriate risk warning specified by and complying with the conditions in Annex II of the CFD Measures.

For the purpose of the restrictions, the term “CFD” is defined to mean:

A derivative other than an option, future, swap or forward rate agreement, the purpose of which is to give the holder a long or short exposure to fluctuations in the price, level or value of an underlying, irrespective of whether it is traded on a trading venue, and that 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.

The CFD Measure will take effect on 1 August, 2019. It will replace ESMA’s temporary product intervention measure restricting the marketing, distribution or sale of CFDs to retail clients, which is set out in Decision 2019/679 and which will expire on 1 August 2019.

Comment

As mentioned above, the Binary Option Measure and the CFD Measure are each intended to replace earlier temporary product intervention measures adopted by ESMA. ESMA has taken product intervention measures regarding binary options, imposing a temporary prohibition on their marketing, distribution or sale, in Decisions (EU) 2018/795, (EU) 2018/1466, (EU) 2018/2064 and (EU) 2019/509. It has taken product intervention measures in relation to CFDs in Decisions (EU) 2018/796, (EU) 2018/1636, (EU) 2019/155 and (EU) 2019/679.

Several other EU Member States have also adopted product intervention measures for binary options and CFDs, each of which has been the subject of an ESMA opinion in accordance with Article 43 of MiFIR (here). 

For its part, the UK is also considering banning the sale, marketing and distribution of cryptoasset derivatives and exchange traded notes that reference certain types of cryptoassets to all retail consumers by all firms acting in, or from, the UK (see our related briefing here).

This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.

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