Amid the rise of prediction markets, European regulators are warning that certain bets may fall under its ban on binary options for retail investors.
In a new policy statement published Friday, the European Securities and Markets Authority (ESMA) stressed that firms that offer trading in event contracts have an obligation to determine whether specific contracts fall under the regulator’s restrictions on binary options — and that contracts that count as financial instruments can only be distributed by registered investment firms.
Under the European trading rules, the kinds of contracts that are considered financial instruments include bets on interest rates, currencies, carbon emission allowances, commodity prices and derivatives linked to climate variables (weather), freight costs and inflation.
Event contracts that are considered financial instruments are classified as derivatives and, given that these kinds of bets have binary outcomes, they fall within the restrictions on binary options — which can’t be marketed, distributed or sold to retail investors — ESMA said in its statement.
This same kind of analysis must be applied to any sort of bet on financial and economic metrics, it noted, regardless of whether they are called “event contracts” or not — the names used to these sorts of wagers is irrelevant to whether they are captured by the trading rules, it stressed.
“[F]irms must conduct a careful legal analysis of these products and their functioning, in order to check whether they may fall within the scope of application of product intervention measures,” it said.
Similarly, characterizing the payout from a binary bet as a “coupon” or a “reward” doesn’t change the fact that the contract itself falls under the trading rules, the regulator noted.