Binary Options: Financial regulators prohibit the distribution and sale of these risky financial derivatives to European customers

By | 13 March 2021

Binary options are attractive to retail investors. But practice has evidently shown that the products are extremely risky.

The German financial supervisory authority Bafin is again taking action on risky financial bets. The authority has banned the marketing, distribution and sale of so-called binary options to private customers in Europe for consumer protection reasons, it announced on Thursday in Bonn. She is reacting to the fact that a temporary ban on securities in the EU by the European supervisory authority ESMA is expiring.

With binary options, investors expect underlying securities such as stocks or currencies to fall or rise over a certain period of time. If the event does not occur, the investor loses his invested capital. If the bet is successful, the option is either paid out or the investor can continue to trade. There is an “all or nothing” principle.

Up until a few years ago, binary options trading was reserved for financial institutions and professional traders, and that exclusively over the counter (OTC market). It is particularly tempting for private investors that they do not theoretically have to have in-depth knowledge of financial products and can also invest with relatively small amounts.

However, when trading binary options, the actual asset value of the traded products (such as gold, stocks, oil, currencies) is not acquired, but only a bet is made on the price development.

Unlike, say, trading in stocks, where a total loss rarely occurs, binary options are traded over the counter via specialized binary options brokers. The duration of the individual bets can last from a few seconds to several months.

Binary options are particularly attractive for small investors in the low interest rate phase, said Bafin Executive Director Elisabeth Roegele. They can be easily traded on online platforms and promise high returns. “However, practice has shown that the products are extremely lossy and very risky for small investors.”

Binary options are complex and not very transparent, according to the regulators. Because of the often very short terms, customers can hardly assess the risk-return profile. In addition, there are conflicts of interest, as many providers set the prices and act as counterparties at the same time.

Since consumers were increasingly complaining about binary options brokers, the financial investment and retirement provision team of the market watchdog finances at the consumer advice center Baden-Württemberg took a random sample of the industry last year. The results are sometimes devastating.

“Binary options are presented as a simple and promising investment, but a large number of providers are questionable from our point of view. Seriousness is often faked with unfair means, ”said Beate Weiser at the time. For example, the market watchdog team found fake news articles in the design of well-known news sites.

In addition, as part of the investigation, consumers also reported unauthorized advertising calls from the brokers. In some cases, a user account could only be opened against a mandatory deposit of around 250 euros. Another point of criticism: The verified providers often confused with poorly translated terms and conditions, and the rules for paying out amounts won are unclear.

“Because the brokers are very often located abroad, consumers find it difficult to enforce their rights. In case of doubt, the reclaim of paid-in deposits would have to be sued through a long legal process. Many brokers are beyond our reach, ”warned Weiser a year ago.

It is not the first time that the regulators intervenes to protect small investors: In May 2017 it banned contracts for differences (CFDs) with additional payment obligations for private investors, with which investors with little capital investment can speculate on the price developments of shares, for example, but can also quickly lose a lot of money up to the assets invested.

In addition, regulators had threatened in 2016 with a ban on credit bonds that allow bets on the creditworthiness of companies. However, after concessions from the financial sector, the authority waived this.

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