Central Bank of Ireland bans sale of binary options

The Central Bank of Ireland is to introduce a ban on the sale of binary options to retail investors and also restrict the sale of contracts for difference (CFD) products.

The new rules will come into effect when temporary restrictions imposed by the European Securities and Markets Authority (ESMA) expire next month.

Last year, ESMA imposed temporary product intervention measures related to the sale of both CFDs – where the investors effectively  bet on the change in value of an asset – and binary options, or bets on yes/no propositions usually relating to share prices rising or falling to set values, to retail investors. The Central Bank has will permanently apply these restrictions to activities in Ireland.

New leverage limits on CFDs will be introduced, alongside a margin close requirement to ensure retail investors cannot lose more money than they put into a CFD account. CFD providers will also be banned from using incentives to encourage investors to buy, and a standardised risk warning will be attached to the products.

“The use of our new national product intervention powers demonstrates our continuing commitment to act decisively and robustly to address investor protection concerns,” Central Bank director general of financial control Derville Rowland said.

“The Central Bank is banning the sale of binary options to retail investors as we consider them a fundamentally flawed product, which have no place in the investment plans of retail investors. They are no more an investment than betting on a horse.”

Last March, the Central Bank issued a warning to investors about both CFDs and binary options, citing research by authorities in the European Union that showed between 74% and 87% of retail clients incurred losses when investing in binary options. A Central Bank study published in 2015 also found that 75% of CFD retail clients made an average loss of €6,900 (£6,130/$7,808)

“Based on our ongoing work on CFDs at a domestic and EU level, we have concluded that retail investors must be protected from excessive levels of leverage, which can result in unexpectedly high levels of losses and from the risk of losing more money than they put into their CFD account,” Rowland said.

“We also want to stop firms using incentives to entice retail investors to trade in these short term, speculative products.”

Ireland joins a number of other European markets in restricting the sale of CFDs and banning binary options. The UK's Financial Conduct Authority banned retail sales of binary options in March this year, effective April 2, while Germany's Federal Financial Supervisory Authority announced a similar move in November 2018.