ESMA “Reminds” Firms of Binary Options Obligations as Prediction Markets Flourish

With the World Cup underway prediction markets are doing booming business, however, in a sternly-worded message, the EU’s financial regulator, the European Securities and Investments Commission, “reminded” firms to tread cautiously and avoid breaching marketing and distribution rules governing binary options.

ESMA says it has “noted” the growth of event contracts, whose financial outcome is binary and depends on a yes-or-no answer to a question about a future event. While noting that not all event contracts are financial instruments, some do fall into scope of the temporary product intervention measures, which prohibits the marketing and distribution of these contracts.

“This statement, which is addressed to firms and NCAs, is a reminder that firms should assess whether the national product intervention measures apply to the products they offer, based on the specific product characteristics,” ESMA says.

Event contracts with a binary outcome and binary pay-out are likely to be derivatives that are financial instruments, and as a result, they are likely to fall in scope of the product intervention measures. The existence of a coupon or reward doesn’t change the nature of these contracts.

ESMA also notes that event contracts may also classify as a bet under national gambling legislation and/or, for the event contracts taking the token form and that are not financial instruments, as crypto-assets regulated under MiCA.

As derivatives, firms providing these contracts must be authorised under MiFID II, regardless of their customer base, meaning that even if the contracts are intended for institutional audiences, companies must be registered, the regulator stresses. “Firms must conduct this careful legal analysis by adhering at all times to the overarching obligation to act honestly, fairly and professionally in accordance with the best interests of clients, to which they are bound,” it adds.