Estonia, Financial Services

The decision applies to all providers of investment services active in Estonia and it took effect from July 2, the FSA said on Wednesday. 

The marketing, distribution and sale of binary options to retail clients is forbidden also in other member states of the European Union. The banning of the offering of said financial instrument in the EU stems from the product's excessive complexity and non-transparency. 

The structurally negative expected return of binary options, a conflict of interest between the provider and the customer, the big difference between the expected return and the risk of loss, as well as problems with the marketing and distribution of the financial product in question gave rise to the need to protect retail investors against said product, the Estonian FSA said.

It said that unlike for professional investors, it is very difficult for ordinary retail investors to understand the risk related to a binary option. Binary options are sold in Europe most often via electronic trading platforms without offering investment advice or the portfolio management service. 

EU supervisors have also noted aggressive marketing practices and the use of misleading advertisements in said market sector. Although there have been no problems with binary options in Estonia to date, the FSA considers it necessary to treat the Estonian market similarly to those of the other EU member states and protect its retail clients against potential excessive risks. 

Since March 2018, the European Securities and Markets Authority (ESMA) has on three occasions imposed a temporary three-month  prohibition on the marketing distribution or sale of binary options to retail clients.

On June 12, ESMA expressed its opinion that the ban on the marketing, distribution and sale of binary options to retail clients to be imposed by the Estonian FSA is justified and proportional.

A binary option is a cash-settled derivative that expires at a pre-specified time. It generally has two possible outcomes at expiry: either it pays out a fixed monetary amount, specified in advance, or it is worth zero, meaning that the investor loses the entire investment. The option pays out at expiry if a specified event relating to the price of the underlying has occurred. If, at expiry, the specified event has occurred, the option is said to "finish in-the-money." Commonly, the specified event that determines whether a binary option pays out is whether the price of the underlying at expiry exceeds the price of the underlying when the option was issued.