BaFin Plans National Prohibition of Binary Options for Retail Clients

The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) is planning to prohibit the marketing, distribution and sale of binary options to retail clients at a national level. For this purpose, it has today published the draft version of a general administrative act(only available in German). The German supervisor is thus already preparing for the expiry of the product intervention measure imposed by the European Securities and Markets Authority (ESMA).

“Especially in the current environment of low interest rates, binary options are a particularly tempting option for retail clients,” BaFin’s Chief Executive Director, Elisabeth Roegele, explains. “They can be traded on easily accessible online platforms and promise high returns. However, experience shows that these products generate extremely high losses for retail clients and pose very high risks,” she cautions.

In particular, BaFin sees risks and thus considerable investor protection concerns in that binary options are complex and lack transparency. This is particularly true of the calculation of their performance as well as the underlying. Unlike other financial instruments, binary options are also not traded on a market where prices result from supply and demand. Instead, it is the provider who determines the price, without its clients being able to understand or examine this. Due to the generally extremely short terms, it is exceedingly difficult for retail clients to accurately assess the risk-return profile. Moreover, binary option providers generally act as the direct counterparty to their clients’ trades. The interests of providers thus directly conflict with those of their clients. For instance, providers could manipulate the price of the underlying at expiry of the binary option or change the term of the binary option by seconds or milliseconds, so as to avoid having to pay out on the option contract.

The marketing, distribution and sale of binary options to retail clients is already prohibited in the European Union due to a temporary measure imposed by the European Securities and Markets Authority (ESMA). BaFin’s envisaged general administrative act will maintain this prohibition once ESMA’s measure expires.

The planned general administrative act has been published on BaFin’s website. Written responses may be submitted until 20 December 2018.