This translation is furnished for information purposes only. The original German text is binding in all respects.

Dear Sir/Madam,

BaFin issues the following

General Administrative Act:

1. I order a prohibition of the marketing, distribution and sale of binary options to retail clients within the meaning of Art. 4(1)(11) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU. This prohibition will come into effect upon expiry of the validity of Decision (EU) 2018/795 of 22 May 2018, as amended by Decisions (EU) 2018/1466 of 21 September 2018, 2018/2064 of 14 December 2018 and 2019/509 of 22 March 2019.

2. Binary options within the meaning of no. 1 are derivative financial instruments

   a) which must be settled in cash,

   b) for which payment is only envisaged following their close-out or expiry and

   c) whose payment is limited to a predetermined fixed amount or zero, in the event that the underlying of the financial instrument meets one or more predetermined conditions and in the event that it does not meet one or more predetermined conditions.

3. The prohibition set out in no. 1 does not apply for binary options which meet the following conditions:

   a) the term from issuance to maturity is at least 90 calendar days;

   b) a prospectus drawn up and approved in accordance with the German Securities Prospectus Act (Wertpapierprospektgesetz – WpPG) or a similar statutory regulation of another Member State of the European Union or Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 July 2017 is available to the public and

   c) the binary option does not expose the provider to market risk throughout the term of the binary option and the provider or any of its group entities do not make a profit or loss from the binary option, other than previously disclosed commissions, transaction fees or other related charges.

4. This general administrative act shall be deemed announced on the day following the public promulgation.

A. Facts

I. Background information on binary options

A binary option is any cash settled derivative in which the payment of a fixed basic amount depends on whether one or more specified events in relation to the price, level or value of the underlying occurs at, or prior to, the derivative's expiry. For example, this will be the case if the underlying has reached a specified price at the derivative’s expiry.

Binary options are also referred to as digital options. The term binary options derives from the mathematical binary system, which always operates on the basis of two states which are expressed by means of the numbers 0 and 1. With binary options, the investor makes a bet on the occurrence of a specified event (generally a fall or a rise in the underlying up to a specified value, within a prescribed period of time) in relation to the price, level or value of one or more underlyings. If the event does not occur, the investor loses their invested capital. This non-occurrence corresponds to a “0” in the binary system. If the event occurs, the option pays out or else the investor can continue to trade. This outcome corresponds to a “1” in the binary system.

Moreover, binary options are typically very short-term investments, in some cases expiring minutes after being entered into, which makes them particularly speculative in nature.

Binary option providers usually act as direct counterparty to the client's trade, hence taking the client's trade onto their own book.

II. Prohibition of the marketing, distribution or sale of binary options to retail clients in the European Union through ESMA

Through its Decision (EU) 2018/795 of 22 May 2018, in accordance with Art. 40 of MiFIR, the European Securities and Markets Authority (hereinafter: “ESMA”) enacted a (temporary) prohibition of the marketing, distribution and sale of binary options to retail clients¹ in the European Union, which came into force on 2 July 2018.

The reasons for the enactment of this prohibition included the fact that, apart from the all-or-nothing principle in relation to the capital invested, the binary options covered by this prohibition are also similar to gambling in terms of how they are marketed and the nature of their trading (e.g. trading options such as “doubling”). Some national competent authorities had also indicated to ESMA prior to the adoption of its Decision (EU) 795/2018 that binary options attract compulsive gambling behaviour. The British financial supervisory authority, the FCA, (hereinafter: “UK-FCA”) notified ESMA that its observations of the market demonstrated that some investors place many bets within the space of a few days or weeks, despite losing money on a cumulative basis. In the view of the UK-FCA, there is thus a close similarity in payoff structure and time horizon between binary options and gambling products. Several other EU countries have expressed similar reservations.

In its justification for its Decision, ESMA also referred to a report issued by the International Organization of Securities Commissions (IOSCO) in which BaFin is represented. This IOSCO report addresses a survey conducted by IOSCO on leveraged OTC products for the retail client market² (hereinafter: the “IOSCO report”). ESMA already referred to the findings of the IOSCO report in its justification for the above-mentioned prohibition. According to ESMA’s conclusions which were based on IOSCO’s findings, before ESMA’s Decision came into effect on 2 July 2018 this market sector had also been subject to significant regulatory scrutiny in a number of other non-EU jurisdictions because of, inter alia, the complex and risky nature of binary options and the often cross-border activities of product providers which operate predominantly through the internet.³ According to the IOSCO report, “recent research reports in several national markets have shown that a large majority of investors in binary options and other speculative products very often lose money”.⁴

This is also borne out by data on losses suffered by retail clients in the period before ESMA’s Decision (EU) 2018/795 of 22 May 2018 came into effect, of which some other national competent authorities had notified ESMA prior to the adoption of this Decision.⁵

According to the IOSCO report, amongst the most common complaints across jurisdictions with regard to authorised providers are those related to product performance (investor losses incurred), the marketing, distribution or sale to clients not understanding the product or service provided (and its risks), difficulties in withdrawing funds, aggressive/misleading marketing, and price or trade manipulation.⁶

III. Distribution of binary options

The binary options covered by the scope of the operative provisions of this general administrative act are generally marketed, distributed and sold electronically through internet platforms. The number of investors investing in binary options is difficult to determine due to the frequently very short life span of the client accounts for binary options and the cross-border dimension of the activities. Before the adoption of its Decision (EU) 2018/795 of 22 May 2018, ESMA had estimated on the basis of the data which it had gathered from a number of national competent authorities that the number of retail clients’ trading accounts from EEA-based CFD (contracts for difference) and binary option providers had increased from 1.5 million in 2015 to approximately 2.2 million in 2017.⁷

The growth of the market sector for binary options across the Union prior to the adoption of the Decision (EU) 2018/795 is confirmed by information provided by national competent authorities to ESMA.⁸

IV. Measures enacted by other national competent authorities

Even before ESMA’s Decision came into effect on 2 July 2018, several member states had already enacted measures in relation to the marketing, distribution or sale of binary options to retail clients:

1. Since August 2016, the Belgian national competent authority, the “Financial Services and Markets Authority”, (hereinafter: “BE-FSMA”) had in place a ban on the commercialisation of certain OTC derivative contracts (including binary options) to retail clients. In addition, the BE-FSMA had forbidden a number of aggressive or inappropriate distribution techniques such as cold calling via external call centres, inappropriate forms of remuneration and fictitious gifts or bonuses.⁹
2. Since December 2016, in France the legislation set forth a ban on investment service providers’ marketing communications to individuals regarding, inter alia, binary contracts.¹⁰
3. In Spain since March 2017, the national competent authority, “Comisión Nacional del Mercado de Valores”, (hereinafter: “ES-CNMV”) had requested entities which market, among retail clients established in Spain, CFDs or forex products, with leverage of over 10 times, or binary options, to expressly inform such clients that the ES-CNMV considers that, due to the complexity and the level of risk of these products, their acquisition is not suitable for retail clients. These entities have also been requested to ensure that clients are informed of the cost they would have to assume if they decided to close their position upon purchasing such products and, in the case of CFDs and forex products, that they are warned that, due to leverage, the losses could be greater than the capital initially committed to purchase the relevant product. In addition, they were obliged to obtain from the client a handwritten or recorded verbal statement that allows them to prove that the client is aware that the product they are going to acquire is particularly complex and that the ES-CNMV considers that it is not suitable for a retail client. Furthermore, the advertising material used by the entities subject to the ES-CNMV’s action to promote these products was required always to contain a warning about the difficulty of understanding the products and also the fact that the ES-CNMV considers that these products are not suitable for retail clients because of their complexity and the level of risk they carry. The ES-CNMV also requested the Cypriot national competent authority, the ”Securities and Exchange Commission“ (hereinafter: “CY-CySEC”) and the UK-FCA to inform binary options providers of these requirements, encouraging providers which provide services in Spain to display the same warning.¹¹
4. In Italy, in February 2017 the national competent authority, “Commisione Nazionale per le Società e la Borsa”, (hereinafter: “IT-CONSOB”) issued a specific communication to warn Italian retail clients on the risks associated with binary options.
5. In February 2018, the Portuguese national competent authority, the “Comissão do Mercado de Valores Mobiliários”, (hereinafter: “PT-CMVM”) issued a circular letter stating that investment firms shall refrain from providing trading services related to derivatives linked to cryptocurrencies if they are unable to ensure compliance with all the information obligations towards clients regarding the characteristics of the products.
6. On 10 May 2017, the Greek national competent authority, the “Hellenic Republic Capital Market Commission”, (hereinafter: “EL-HCMC”) issued a circular on providing investment services in over-the-counter derivative financial instruments (including forex, CFDs and binary options) through electronic trading platforms.¹²
7. In the Czech Republic, the national competent authority, the “Central National Bank”, (hereinafter: “CZ-CNB”) issued a statement in October 2015 to warn retail investors about the risks associated with binary options.
8. In the Netherlands, in February 2017 the national competent authority, the “Autoriteit Financiële Markten”, (hereinafter: “NL-AFM”) launched a consultation paper that proposes to make certain products, including binary options, subject to an advertising ban.
9. In Cyprus, in February 2017 CY-CySEC issued a consultation paper proposing to ban the distribution and trading of binary options in their current form, so as for the final product to take on the characteristics of an on-exchange derivative product.¹³
10. In December 2016, the UK-FCA anticipating that binary options would be brought within the scope of their regulation from 3 January 2018, consulted on early policy considerations for potential enhanced conduct of business rules for binary options, including potential use of product intervention powers to modify the particular product features of binary options or to place restrictions on the sale and marketing of these products to retail investors. The UK-FCA also issued a consumer warning about the risks of investing in binary options on 14 November 2017.¹⁴
11. In December 2016, the Austrian national competent authority, the “Finanzmarktaufsichtsbehörde”, (hereinafter: “AT-FMA”) issued a warning regarding the risks associated with CFDs, rolling spot forex and binary options.
12. In addition to this, the Norwegian national competent authority, the “Finanstilsynet”, (hereinafter: “NO-Finanstilsynet”) published on 26 February 2018 a consultation paper in which it proposed, inter alia, a ban on the marketing, distribution or sale of binary options to retail clients, as proposed by ESMA in its call for evidence.
    

V. Renewal and amendment decision adopted by ESMA

Through its Decision (EU) 2018/1466 of 21 September 2018 (hereinafter: Renewal and Amendment Decision), ESMA renewed its Decision (EU) 2018/795 of 22 May 2018 and amended its contents.¹⁵ This Renewal and Amendment Decision came into effect on 2 October 2018 for a period of 3 months. Art. 1(3)(b) exempts certain types of binary options from the prohibition stipulated in ESMA’s Decision. These are binary options within the meaning of no. 3 of the above operative provisions of this general administrative act. In addition, in Art. 1(3)(a) of its Renewal and Amendment Decision ESMA exempted from this prohibition binary options for which the lower of the two predetermined fixed amounts is at least equal to the total payment made by a retail client for the binary option, including any commission, transaction fees and other related costs.

This general administrative act is applicable for all binary options which do not fall under no. 3 of its operative provisions, even if they are marketed, distributed or sold under different names (e.g. all-or-nothing options, up-or-down options, one-touch options or digital options). It is also applicable for binary options that have several different predetermined conditions, which have to be met (or not met) before the payment is provided.

VI. Second renewal decision adopted by ESMA

Through its Decision (EU) 2018/2064 of 14 December 2018 (hereinafter: the “Second Renewal Decision“) ESMA has renewed its Decision (EU) 2018/1466 of 21 September 2018.¹⁶ The Second Renewal Decision came into effect on 2 January 2019 for a period of three months and, as with Decision (EU) 2018/1466, Art. 1(3)(b) excludes certain binary options from the prohibition stipulated in ESMA’s Decision. These are binary options within the meaning of no. 3 of the above operative provisions of this general administrative act. In addition, through Art. 1(3)(a) of its Second Renewal Decision – as was already the case in its Decision (EU) 2018/1466 – ESMA has excluded from this prohibition binary options for which the lower of the two predetermined fixed amounts is at least equal to the total payment made by a retail client for the binary option, including any commission, transaction fees and other related costs.

VII. Third renewal decision adopted by ESMA

Through its Decision (EU) 2019/509 of 22 March 2019 (hereinafter: the “Third Renewal Decision“), ESMA extended the period of validity of its Decision (EU) 2018/2064 of 14 December 2018.¹⁷ The Third Renewal Decision came into effect on 2 April 2019 for a further period of three months.

VIII. Consultation prior to the adoption of this general administrative act by BaFin

On 29 November 2018, BaFin published a draft version of a general administrative act and provided involved parties with the opportunity to respond in the period up to 20 December 2018 under section 28 (1) of the VwVfG.¹⁸ BaFin has received a total of four responses. These comprise one submission from a stakeholder and three submissions from members of the public. Involved parties have not submitted any statements.

The stakeholder fully agrees with BaFin‘s envisaged prohibition. In particular, the stakeholder welcomes the exemption pursuant to no. 3 of the above operative provisions.

The three members of the public criticise in principle the course of action of prohibiting the marketing, sale and distribution of financial instruments in order to protect retail clients from themselves and their investment decisions, some of them considering this to entail these retail clients’ “incapacitation”. In addition, such prohibitions would merely result in retail clients turning to providers outside of the EU, which cannot be in the interests of consumer protection.

Moreover, one member of the public insists upon a further sub-classification of the retail client category in terms of experienced and unexperienced investors. The marketing, sale and distribution of binary options to experienced retail clients should remain possible if they have previously submitted a written declaration confirming that they are familiar with, and have understood, all of the consumer protection reservations relating to trading of binary options.

Additionally, one member of the public argues that it would be more proportionate merely to prohibit the marketing of binary options, which is sometimes shady.

B. Grounds

As already outlined in section A. III., as a rule binary options are marketed, distributed and sold electronically via internet platforms. This means that, even though as far as BaFin is aware no binary option providers are currently located in Germany, German retail clients are nonetheless exposed to the significant risks outlined below which give rise to significant investor protection concerns. Binary options are traded over the internet on a cross-border basis. For this reason, it is also necessary to prevent binary option providers from switching to European Union countries where the marketing, distribution and sale of binary options to retail investors are less regulated or not regulated at all.

According to the view put forward by ESMA in its Decision (EU) 2018/795 of 22 May 2018, comprehensive protection of retail clients against the risks associated with binary option trading would have required the national competent authorities of all of the Member States to enact measures aiming to achieve the minimum level of investor protection stipulated in ESMA’s Decision¹⁹ without delay.²⁰ However, since this had not occurred prior to the adoption of ESMA’s Decision, ESMA initially made use of its temporary product intervention power, so as to ensure protection without delay. Through the prohibition stipulated in this general administrative act, BaFin will maintain the necessary level of investor protection in Germany following the end of the period of application of ERMA’s measure.

Upon expiry of the period of application of ESMA’s measure, in the view of BaFin it is necessary to aim for the other national competent authorities of the EU Member States to enact their own national measures which are similar to this general administrative act of BaFin for their respective territorial jurisdictions. If all national competent authorities of the Member States were to enact similar measures which, like this general administrative act of BaFin, came into effect immediately upon expiry of ESMA’s measure, the marketing, distribution and sale of binary options would be prohibited throughout the European Union, as stipulated in these operative provisions, for providers from any EU Member State as well as providers from third countries outside of the EU. The scope of protection for retail clients in Germany and the enforceability of protection against the considerable risks associated with binary option trading would thus be achieved even more effectively than through the general administrative act of BaFin alone.

This is also applicable in view of the fact that ESMA already determined, in its Decision (EU) 2018/795 of 22 May 2018, the growing spread of the distribution of binary options in new countries of the European Union where they had not previously been distributed.²¹ This demonstrates the direct risk of evasive actions by binary option providers.

I. Basis in law

This general administrative act of BaFin is based upon Art. 42(1) of MiFIR. Under Art. 42(2)(1)(a)(i) of MiFIR, BaFin may restrict the marketing, distribution and sale of financial instruments with certain specified features if it is satisfied on reasonable grounds that a financial instrument gives rise to significant investor protection concerns and that the action is proportionate taking into account the nature of the risks identified, the level of sophistication of investors or market participants concerned and the likely effect of the action on investors and market participants.

These preconditions are fulfilled in this case.

1. Financial instruments with certain specified features

The subject matter of this administrative act are binary options, i.e. financial instruments within the meaning of Art. 2(1)(9) of MiFIR in conjunction with Art. 4(1)(15) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (hereinafter: “MiFID II”).

Binary options are financial instruments with certain specified features within the meaning of Art. 2(1)(9) of MiFIR in conjunction with Art. 4(1)(15) of MiFID II. According to Annex I Section C(4) of MiFID II, to which Art. 4(1)(15) of MiFID II refers, all options, futures, swaps, forward rate agreements and all other derivative contracts relating to securities, currencies, interest rates or yields, emission allowances or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash are financial instruments.

Binary options are derivatives. The key characteristic of a derivative is that the valuation and thus the price of the option which may be asserted or must be fulfilled in the future or over a future period of time is, by design, directly or indirectly dependent on an underlying which is itself subject to price and valuation fluctuations. This is the case for binary options. Their valuation is dependent on a specific underlying which is itself subject to price and valuation fluctuations, since it is based on the performance of equities, indices, currencies, commodities or other underlyings. The criterion of a deferred settlement date is also applicable.

2. Significant investor protection concerns in relation to the marketing, distribution and sale of binary options to retail clients (Article 42(2)(1)(a)(i) variant 1 of MiFIR)

The marketing, the distribution and the sale of binary options to retail investors give rise to significant investor protection concerns within the meaning of Art. 42(2)(1)(a)(i) of MiFIR.

MiFIR introduces a product intervention right which is directly applicable in the Member States. This EU Regulation entered into force on 3 January 2018. With regard to the preconditions for a product intervention measure, on 19 December 2014 ESMA published “Technical Advice”²² whose criteria have been reflected in Commission Delegated Regulation (EU) 2017/567 of 18 May 2016²³ (hereinafter: the “Delegated Regulation”).

According to Art. 42(2)(a)(i) of MiFIR, a product intervention measure may be implemented, inter alia, in case of significant investor protection concerns. BaFin has referred to the following criteria and factors listed in Art. 21(2) of the Delegated Regulation in determining whether binary options give rise to significant investor protection concerns:

• the degree of complexity of the financial instrument (Art. 21(2)(a) of the Delegated Regulation)
• the degree of transparency of the financial instrument (Art. 21(2)(d) of the Delegated Regulation)
• the particular features of the financial instrument (Art. 21(2)(e) of the Delegated Regulation)
• the size of potential detrimental consequences (Art. 21(2)(b) of the Delegated Regulation)
• the existence and degree of disparity between the expected profit for investors and the risk of loss in relation to the financial instrument (Art. 21(2)(f) of the Delegated Regulation)
• the type of clients to whom a financial instrument is marketed or sold (Art. 21(2)(c) of the Delegated Regulation)
• the selling practices associated with the financial instrument (Art. 21(2)(j) of the Delegated Regulation)
• whether a financial instrument would threaten investors’ confidence in the financial system (Art. 21(2)(v) of the Delegated Regulation)

After taking the relevant criteria and factors into consideration, BaFin has concluded that binary options give rise to significant investor protection concerns for the following reasons.

2.1 Degree of complexity and transparency of binary options

Binary options are complex financial instruments.²⁴
In the case of binary options, the significant investor protection concerns first of all result from the complexity of the calculation of their performance and the lack of transparency in the calculation of the underlying.

The complexities of the pricing structure for binary options typically pose a risk of significant information asymmetries between providers and retail clients and hence raise significant investor protection concerns. Furthermore, as well as their pricing there are additional inherent features of binary options that make them complex and difficult for retail clients to understand.

Binary option providers typically price binary options based on the market-implied or otherwise modelled probability of a specified event²⁵ occurring before applying a spread or other form of transaction fee to each option such that it yields a negative expected return for the client.

Most commonly binary options offer a comparatively large return for a statistically less likely event and vice-versa.²⁶

This pricing structure of binary options presents a number of challenges for retail clients. In particular, the pricing structure requires retail clients to accurately assess the value of the option in relation to the expected probability of the reference event occurring. Retail clients face significant information asymmetries compared to providers. Providers have considerably greater access to information and systems to properly price and value these products. Binary option providers have access to real-time price data which is not generally available to retail clients. Binary option providers also have much more experience in pricing contracts than retail clients typically do and are more likely to have developed sophisticated pricing methodologies. Furthermore, retail clients may not appreciate that if, as is usual, these binary options have a very short term factors used to price non-binary options such as historic volatility have hardly any impact on the binary option's value. This limits the possibility for retail clients to properly value the binary option, even when using available pricing tools. Moreover, due to the use of spreads and other transaction fees, retail clients would need to outperform expected returns on investment significantly (“beat the odds”) on a regular basis to achieve profits from trading. It is therefore difficult for retail clients to make an informed assessment of the risk-return profile of binary options.

Moreover, prior to the adoption of ESMA’s Decision (EU) 2018/795 other national competent authorities had identified practices whereby binary options providers apply an asymmetrical or inconsistent mark up to core spreads on the underlying, which results in the option being “out of the money” where it otherwise would be “in the money” at expiry.²⁷ For instance, this will apply where the price of the underlying for the binary option has reached or exceeded a specific previously agreed value and the binary option would thus make “money” at this point. On the other hand, being “out of the money” would mean that the binary option would not make any “money” at this time.

The combined effect of the pricing structure and the application of transaction fees to each contract is that a large majority of retail client accounts lose money in aggregate (even though they may make short-term profits). At the same time, providers, which are typically direct counterparties to the trade, make a profit from clients in the long term through their losses from trading and through transaction fees. As the direct counterparty, the providers of binary options determine the price at execution as well as the payment at expiry. In addition, providers often require clients to acknowledge that the prices used to determine the value of the binary option may differ from the price available in the respective underlying market. This means that it may not always be possible for retail clients to check the accuracy of the prices received from the provider.

The pricing, performance and settlement of binary options are not standardised in the case of those binary options which are covered by the operative provisions and are not traded on an exchange (over the counter - “OTC”). This requires additional effort on the part of retail clients to understand the terms of the product. For the retail client, it is thus even harder to make an independent decision on the “yes/no” propositions that form the basis of a binary option. The lack of standardisation in terms of the pricing, performance and settlement of binary options combined with their complex pricing structure and the even more complex offerings (such as options that package together a set of binary options) make a decision even more complex for a retail client. This further undermines retail clients’ ability to understand that the specific features of one type of binary option do not necessarily feature in another.

Together, these factors make it extremely difficult for retail clients to value binary options objectively. The high level of complexity and poor degree of transparency associated with the trading of binary options for retail clients therefore already raises significant investor protection concerns.

2.2 Particular features or components of binary options

Moreover, the particular features of binary options also raise significant investor protection concerns.

Binary options are generally extremely short-term investments which in some cases have terms of just a few minutes and are therefore particularly speculative by nature.

Binary options can only be used for speculative purposes, since their payoff structure is binary. The payment of a fixed monetary amount or zero significantly limits the value of binary options as a hedging tool in contrast to traditional options, which allow the client to manage their risk by setting a “ceiling” or “floor” for a specific asset that they may have direct exposure to. This is exacerbated by the typical short term of binary options.

Furthermore, binary options are priced according to the probability of an event occurring, quoting payoffs in a similar manner as traditional fixed-odds bets (for example, bets on sporting events or election outcomes). Trades are mostly of very short terms and investors stand either to make a very large return or to lose their entire investment. These fundamental features are also found in gambling products, which are linked with addictive behaviour and poor outcomes for consumers (e.g. indebtedness).

Given that binary options structurally have negative expected returns, the more positions an investor takes, the more likely they are to lose money on a cumulative basis.²⁸

As well as these particular features, there is a risk of providers of binary options being exposed to conflicts of interest in relation to their clients which raise significant investor protection concerns.

Binary option providers usually act as direct counterparty to the client's trade, hence taking the client's trade onto their own book. This business model places the provider's interests in direct conflict with those of its clients, which increases the risk that the provider may manipulate the price of the underlying at expiry of the binary option or change the term of the binary option by seconds or milliseconds so as to avoid having to pay out on the option contract. Unlike other financial instruments, binary options are not traded on a market where the prices are determined by supply and demand. The client thus completely lacks the possibility of a comparison with other prices for similar, let alone identical binary options. The binary option provider instead determines the price independently of supply and demand, without clients even being able to begin to understand or examine this price. This situation is aggravated by the fact that the client must then make an extremely quick purchase decision, in view of binary options’ terms which tend to be extremely short. The risk of conflict of interest is also particularly large for binary options because the payment structure of these products is dependent on whether the underlying has reached the specified strike price at expiry.

As well as the (basic) conflict of interest already outlined above which results from the fact that binary option providers usually act as direct counterparty to the client’s trade, hence taking the client’s trade onto their own book, prior to the adoption of its Decision ESMA had also determined that the provider’s profit results either directly (in case of its own marketing, distribution and sale of binary options) or indirectly (in case of the marketing, distribution and sale of binary options with the assistance of third parties such as distribution partners) from the client’s trading volume (the higher the trading volume, the greater the profit for the provider). The higher the client’s loss as the counterparty, the higher the provider’s own profit.²⁹ ESMA also determined that in case of the marketing, distribution and sale of binary options with the assistance of third parties (such as distribution partners) these third parties are also paid in accordance with the trading volume. The higher the trading volume, the higher the reward for the third party. Binary option providers and third parties thus both have an interest in as high a volume of trading as possible, but which then results in higher losses for the client as outlined above.³⁰ This aggravates the existing (basic) conflict of interest. ESMA also found that there is significant pressure in relation to binary options to continuously gain new clients, since client accounts are only used, on average, for a short period of time for the trading of binary options. This aggravates the (basic) conflict of interest still further.

BaFin assumes that these conflicts of interest will continue to apply in future in case of the marketing, distribution and sale of binary options to retail clients within the meaning of Art. 4(1)(11) of MiFID II in Germany upon expiry of the period of application of ESMA’s Decision (EU) 2018/795.

Their speculative nature, akin to gambling, and the high risk of conflicts of interest are particular features of binary options within the meaning of Art. 21(2) of the Delegated Regulation which likewise raise significant investor protection concerns.

2.3 The size of potential detrimental consequences and the degree of disparity between returns for investors and the risk of loss

The scope of possible negative effects and the discrepancy between the expected profit and the risk of loss in case of unrestricted trading of binary options in Germany would be considerable. Significant distribution of binary options to German retail clients would then be likely, which would in turn result in high loss rates for these clients.

As already outlined above, the actual number of investors who invest in binary options is uncertain due to the relatively short life span of client accounts for binary options and the cross-border dimension of activities. However, like other national competent authorities BaFin assumes a continuous rise in numbers of investors in the European Union up to the adoption of ESMA’s Decision of 22 May 2018.

As part of an ESMA survey of all of the national competent supervisory authorities in the European Union in January 2017, on the basis of its own continuous monitoring of the German market BaFin estimated the number of investors in binary options in Germany for 2016 to be up to 30,000, with an annual growth rate for the overall market in Germany of 4-5%. Accordingly, it estimated the number of investors in binary options in Germany for 2017 to be up to 31,500. BaFin assumes that this trend continued up to the date of the entry into force of ESMA’s Decision (EU) 2018/795 of 22 May 2018 on 2 July 2018. In view of the past market trend outlined above, it may be assumed that – if BaFin were not to resolve any measures of its own in line with this general administrative act upon expiry of the period of application of ESMA’s measure – there would immediately be a significant resurgence of the (active) distribution of binary options to retail clients in Germany.

In its Decision (EU) 2018/795 of 22 May 2018, ESMA estimated on the basis of data gathered from other national competent authorities³¹ that the number of retail clients' trading accounts from EEA-based CFD and binary option providers increased from 1.5 million in 2015 to approximately 2.2 million in 2017.³²

The information which ESMA has been provided with from other national competent authorities according to its Decision (EU) 2018/795 of 22 May 2018 also confirms that the market sector for binary options had grown across the Union before ESMA's Decision (EU) 2018/795 of 22 May 2018 came into effect on 2 July 2018:

a) The CY-CySEC estimated the total number of active clients in Cyprus in binary options at the end of the second quarter of 2017 to be 401,378, compared to 140,205 in 2015.³³

b) From sample client data provided to the UK-FCA, ESMA estimated that the number of clients trading with UK binary option providers was around 40,000 prior to the adoption of ESMA’s Decision (EU) 2018/795 of 22 May 2018.³⁴

c) The IT-CONSOB found on the basis of a survey carried out in March 2017 at five branches of EU-based binary option providers that in 2016 there was a 2.4% increase in the number of Italian retail clients trading in binary options, by comparison with 2015.³⁵

d) A number of national competent authorities in other EU countries reported to ESMA that binary options are widely marketed and sold in their jurisdictions.³⁶

e) BaFin – like almost all of the other national competent authorities³⁷ – reported to ESMA that binary option providers passporting from other Member States are providing services in binary options in their jurisdictions.³⁸

f) Other national competent authorities³⁹ had also mentioned binary option providers using branches or tied agents to passport to host jurisdictions.

g) According to ESMA’s Decision of 22 May 2018, other national competent authorities have noted an increase in the number of requests for authorisation for investment firms offering the products in question.⁴⁰

Prior to the adoption of the Decision of ESMA (EU) 2018/795 of 22 May 2018, the most common complaints across jurisdictions with regard to authorised providers were those related to product performance (investor losses incurred), clients not understanding the product or service provided (and its risks), difficulties in withdrawing funds, aggressive/misleading marketing, and price or trade manipulation.⁴¹

The loss rates of retail clients – i.e. non-professional clients – determined by various supervisory authorities in other EU countries and reported to ESMA, as stated in ESMA’s Decision (EU) 2018/795 of 22 May 2018 within the scope of ESMA’s own analysis⁴² – were between 74 and 87%:

a) CY-CySEC conducted analysis of a sample of binary option client accounts of 10 binary options providers for the period from 1 January 2017 to 31 August 2017. It found that, on average, 87% of client accounts had made a loss over that period. On average, the loss per account amounted to approx. EUR 480.⁴³

b) The national competent authority in Poland, Komisja Nadzoru Finansowego (hereinafter: “PL-KNF”), based on data from a Polish investment firm, found that 86.3% of the clients lost money in 2016 and 86.4% lost money in 2017.

c) IT-CONSOB found on the basis of a survey carried out in March 2017 at five branches of EU-based investment firms active in binary options that Italian retail clients investing in binary options realised relevant losses in 2016 up to 74% with an average loss of approximately EUR 590.

d) UK-FCA found from a review of firm data reporting client account performance in 2016 that between 81% and 85% of client accounts lost money and that, on average, clients made a loss between GBP 400 and GBP 1,200. Reported figures indicate that clients made a profit from trading but made a loss when taking into account the impact of transaction fees. This indicates that clients may not have understood the impact of transaction fees on the performance of their account.

The stated high loss rates for retail clients investing in binary options demonstrate the high probability of retail clients losing their invested capital and raise significant investor protection concerns.

2.4 Marketing and distribution activities in relation to binary options

The nature of the marketing and distribution of binary options to retail clients prior to the entry into force of ESMA’s Decision (EU) 2018/795 on 2 July 2018 also raises significant investor protection concerns.

Although binary options are complex products, they were offered to retail clients most commonly via electronic trading platforms, without the provision of investment advice or financial portfolio management. This is likely attributable to the fact that binary options generally only have a term of just a few seconds or just a few minutes. Where binary options are offered via electronic trading platforms without the provision of investment advice or financial portfolio management, an evaluation of the appropriateness of this product for the client is necessary under section 63 (10) of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG).⁴⁴ For an appropriateness assessment, section 63 (10) sentence 1 of the WpHG does require investment firms to ask their clients or potential clients to provide information regarding their knowledge and experience relevant to the specific product or service offered or demanded, so as to enable the provider to determine whether these investment services or products are appropriate for the client. However, even in those cases where an evaluation of appropriateness in accordance with section 63 (10) of the WpHG determines that the binary option is not appropriate for the client or potential client, under section 63 (10) sentences 3 and 4 of the WpHG trading with this client is nonetheless permitted once the client has received a simple warning. Trading with the client is likewise permitted under section 63 (10) sentence 5 of the WpHG in cases following a simple warning where the client or the potential client has not previously provided any information or has provided insufficient information. Unlike in the case of this prohibition, in the view of BaFin in many cases this simple warning will not deter potential clients or clients from trading. If the potential client or the client has provided no or insufficient information to the provider as to their knowledge and experience in the investment field relevant to the specific type of product, this will not automatically mean that retail clients will be denied access to products such as binary options which, by their features, should not be distributed to them. This is true even if the provider has concluded from the information provided by the potential client or by the client as to their knowledge and experience in the investment field that the product is not appropriate for the potential client or for the client. Retail clients can thus access products such as binary options, even though, by their features, they should not be distributed to them.⁴⁵

Until ESMA’s Decision (EU) 2018/795 entered into force on 2 July 2018, foreign investment firms marketed, distributed and sold binary options to retail clients in Germany on a cross-border basis. BaFin has noted that investment firms based in another European Union jurisdiction, although small in size, use up to 200 introducing brokers simultaneously. The distribution of binary options occurred not only over the internet, but also through electronic gaming or slot machines.

These trends were particularly alarming in view of the growing number of retail clients trading binary options until ESMA’s Decision (EU) 2018/795 entered into force on 2 July 2018.

Moreover, according to ESMA’s Decision (EU) 2018/795 of 22 May 2018, several other national competent authorities had expressed concerns on account of the churning⁴⁶ nature of the business models involved. Until ESMA’s Decision (EU) 2018/795 of 22 May 2018 entered into force, BaFin had churning-type concerns in relation to binary options due to the (basic) conflict of interest already outlined above which results from the fact that binary option providers usually act as direct counterparty to the client's trade, hence taking the client's trade onto their own book. As already indicated above, the profit for the provider or the third party is inversely proportionate to the loss suffered by the client as the counterparty to the trade with the provider. Binary option providers thus had huge incentives to encourage clients, to their detriment, to trade binary options as frequently as possible, with the highest possible volumes, in their own interests of making and maximising profits.

Because the average life span of a client account can be relatively short, this can place a certain pressure on providers of binary options to maintain a steady stream of new clients, which in turn incentivises providers to adopt aggressive marketing and sales techniques that are not in the retail client’s best interests.

A marketing instrument which, according to ESMA’s findings as stated in its Decision (EU) 2018/795 of 22 May 2018, was commonly used in the marketing and sales techniques adopted by the binary option industry until ESMA’s Decision (EU) 2018/795 entered into force on 2 July 2018 is the offer of (monetary and non-monetary) “benefits” such as bonuses, the offer of “gifts” (for example holidays, cars, electronic goods), trading tutorials or reduced costs (for example spread or fees) in case of regular or large-scale trading⁴⁷, in order to attract and encourage retail clients to trade binary options.

As well as other national competent authorities, BaFin has itself observed that binary option providers frequently used the offer of monetary benefits in the form of bonuses until ESMA’s Decision (EU) 2018/795 entered into force on 2 July 2018. In the cases observed by BaFin to date, bonuses were offered by providers acting on a cross-border basis. These bonuses offered an incentive to inexperienced retail clients to speculate in binary options even though they may not have fully understood them. Bonuses are typically targeted to attract retail clients by offering them material incentives for trading. Retail clients can consider these promotions as a central product feature to the point they fail to properly assess the level of risks associated with the product. The practice of bonus systems is inspired by the online betting industry. Some providers marketing the relevant products offer “welcome bonuses” (for any account opening) as well as bonuses based on the invested amounts (volume bonuses), for example, or as additional amounts of “virtual cash” under certain conditions.

Bonuses and other trading benefits can act as a distraction from the high-risk nature of the product.

Individual national competent authorities provided ESMA with the following specific notifications regarding bonuses⁴⁸:

a) FR-AMF pointed out to ESMA that one of the main issues about bonuses is that the client typically has to invest 20 or 30 times the amount of the bonus to have the right to withdraw the money⁴⁹;

b) BE-FSMA reported to ESMA that it had received many complaints from investors unable to recover their money due to the conditions applicable to bonuses⁵⁰;

c) PL-KNF reported to ESMA that providers offer gifts like tablets or phones to attract new clients, and that providers claim the gifts enhance the client's ability to contact the investment firm.⁵¹

According to ESMA’s Decision (EU) 2018/795 of 22 May 2018, other national competent authorities had voiced concerns about the compliance of providers of binary options with their obligations to give clients fair, clear and not misleading information or act in the best interests of clients.⁵²

According to ESMA’s Decision (EU) 2018/795 of 22 May 2018, national competent authorities were also concerned about the quality of information provided to retail clients (for example on providers' websites) about how binary options work, and in particular information presented about the risks involved.⁵³ Some examples that are not compliant with the obligation for information to be fair, clear and not misleading and which use techniques drawing clients' attention but not necessarily reflecting the suitability or overall quality of the financial instrument or practice relate to:

a) website content or information presented in a language that is not a national language of the Member State where the services are to be provided, or presented in the official language but based on translations of insufficient quality, such that this is likely to hamper the comprehension of the information presented; and

b) presenting information that emphasises the possible benefits associated with investing in binary options without also giving a fair and prominent indication of the relevant risks, suggesting that these speculative products are suitable or appropriate for all investors or that making a return is a simple task. The following examples are provided: “Trading binary options is as easy as 1-2-3”; “Trading has never been so easy”, ”Start your career as a trader right now”, “Gain up to 85% return every 60 seconds”, “95% return in a few minutes”, and “What can you do in 60 seconds? Trade binary options and double your money”.⁵⁴

All of this shows that the nature of the marketing and distribution of binary options to retail clients before ESMA’s Decision (EU) 2018/795 entered into force on 2 July 2018 gives rise to significant investor protection concerns.

2.5 Nature of the clients affected

Until ESMA’s Decision (EU) 2018/795 entered into force on 2 July 2018, binary options were widely marketed, distributed and sold in the retail client mass market in Germany. The complexity of binary options, as outlined above, makes it difficult for the majority of retail (unlike professional) clients to properly understand and assess the actual risk they incur when dealing with these products. In the view of BaFin, the evidence of losses observed by ESMA in retail client accounts – see section 2.3 above – proves that binary options are unsuited to retail clients.

2.6 Degree to which the financial instrument may threaten investors' confidence in the financial system

The combination of the degree of complexity of binary options and the lack of transparency in their trading, the negative expected return of the product for investors, the lack of reasonable investment objectives, the misleading and aggressive nature of many marketing and distribution activities, conflicts of interest for providers as well as the size of potentially detrimental consequences for retail clients all contribute to retail clients losing confidence in the financial system.

Given the high probability of clients with binary options suffering losses as evidenced in this general administrative act, investors who had been attracted by the aggressive marketing conducted by binary option providers may conclude that these products are representative of all financial instruments. These concerns are even more significant in view of the large number of retail clients who were clients of binary option providers before ESMA’s Decision (EU) 2018/795 entered into force on 2 July 2018 and the large number of complaints made in relation to these products up to this date.

The upshot is that the marketing, distribution and sale of binary options to retail clients raises significant investor protection concerns within the meaning of Art. 42(2)(1)(a)(i) of MiFIR.

3. No adequate alternatives for addressing the risks indicated in Article 42(2)(1)(a) of MiFIR and addressing the issue by improved supervision or enforcement of existing requirements (Article 42(2)(1)(b) of MiFIR)

In accordance with the provisions of Art. 42(2)(1)(b) of MiFIR, BaFin has examined whether – upon expiry of the period of application of the temporary ESMA measure under Art. 40 of MiFIR – adequate alternatives are available in order to address the risks indicated in Art. 42(2)(1)(a) of MiFIR and to address the issue by improved supervision or enforcement of the existing regulatory requirements under Union law. The applicable existing regulatory requirements are laid down in MiFID II, MiFID II Delegated Directive (EU) 2017/593, MiFID II Delegated Regulation (EU) 2017/565, MiFIR and Regulation (EU) No 1286/2014 of the European Parliament and of the Council as well as national acts of transposition in the WpHG and the German Regulation Specifying Rules of Conduct and Organisational Requirements for Investment Services Enterprises (Verordnung zur Konkretisierung der Verhaltensregeln und Organisationsanforderungen für Wertpapierdienstleistungsunternehmen – WpDVerOV).

This includes the following requirements:

a) the requirement to provide appropriate information to clients in Art. 44 to 51 of Delegated Regulation (EU) 2017/565 transposing Art. 24(3) and (4) of MiFID II⁵⁵;

b) the suitability and appropriateness requirements in Art. 54 to 56 of Delegated Regulation (EU) 2017/565 transposing Art. 25(2) and 3 of MiFID II⁵⁶;

c) the obligation to execute orders on terms most favourable to the client in Art. 64 to 66 of Delegated Regulation (EU) 2017/565 transposing Art. 27 of MiFID II⁵⁷;

d) the product governance requirements in Art. 9 and 10 of Delegated Directive (EU) 2017/593, concretised by ESMA’s Guidelines on MiFID II product governance requirements (ESMA35-43-620 DE) transposing Art. 16(3) and Art. 24(2) of MiFID II

e) the product information obligations for manufacturers of packaged products for retail clients in Art. 5 to 14 of Regulation (EU) No 1286/2014.

As well as the requirements set out above in a) to e), it was also necessary to review whether

f) the significant investor protection concerns might be addressed through the exercise of BaFin’s supervisory powers in implementation of Art. 69 of MiFID II.

The scope and the contents of some of the regulatory requirements applicable under MiFID II and MiFIR are comparable with the existing regulatory requirements applicable according to Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC (hereinafter: “MiFID”).⁵⁸

The adoption of MiFID II and MiFIR aimed to improve several notable aspects of investment services and activities to strengthen investor protection (including through product intervention powers) by comparison with MiFID I. The provisions of MiFID II are essentially unchanged by comparison with MiFID in regard to the risks and the detriment for investors which are addressed through this general administrative act upon expiry of the period of application of the temporary ESMA measure under Art. 40 of MiFIR.

Re. a)
BaFin has reviewed whether the provisions on fair information for clients under sections 63 (1), (6) and (7) of the WpHG (as national implementing acts of Art. 24(3) and (4) of MiFID II) adequately address the risks indicated in Art. 42(2)(1)(b) of MiFIR and whether the issue would be better addressed by improved supervision or else enforcement of the requirements stipulated in these provisions. The requirements of providing appropriate information for clients are outlined in further detail in MiFID II. The German legislature has translated these provisions into national law through their incorporation into the WpHG. The area of information for the client on costs and charges has been significantly improved through the requirement to provide clients with aggregated information on all costs and charges in connection with the investment services and the financial instruments.

However, the rules based on transparency in relation to the client — including improved information on costs — alone are insufficient to tackle the risk arising from the marketing, distribution or sale of complex products such as binary options to retail clients.

Section 63 (6) of the WpHG requires investment firms to ensure, inter alia, that all information, including marketing communications, addressed to clients or potential clients is fair, clear and not misleading. Section 63 (7) in conjunction with section 64 (1) of the WpHG further requires investment firms to give appropriate information in good time to clients and potential clients with regard to the firm and its services, the financial instruments and proposed strategies, execution venues and all costs and related charges which are necessary so that clients may reasonably understand the nature of the financial instruments or investment services which are offered to them or which they have requested, as well as the associated risks, and to make an investment decision on this basis. This information must notably include suitable guidance on and warnings of the risks associated with investing in those financial instruments and whether the financial instrument is intended for retail or professional clients. Based on the nature of the investor protection concerns set out above in relation to binary options (in particular their complexity, riskiness and expected negative return), it is evident that such retail client detriment cannot be entirely and adequately controlled through the mere application of section 63 (6) of the WpHG and section 63 (7) in conjunction with section 64 (1) of the WpHG, upon expiry of ESMA’s measure. The information specified in section 63 (7) in conjunction with section 64 (1) of the WpHG does not adequately draw retail clients’ attention to the concrete consequences (negative expected return or even total loss) of investing in these products and does not adequately address the risks inherent in these products.

Re. b)
The requirements in respect of the suitability and appropriateness of financial instruments for distribution to investors (considering products against clients’ knowledge and experience, financial situation and investment objectives) have also been strengthened in MiFID II in that investment firms are required to provide the client with a report on the suitability of the financial instrument prior to the conclusion of the contract and to assess its suitability on the basis of the client’s details and the product characteristics of the specific financial instrument. The German legislature has likewise translated these provisions into national law through their transposition into the WpHG.

Section 64 (3) of the WpHG (suitability assessment) requires investment firms, such as binary option providers, to obtain the necessary information regarding the client's or potential client's knowledge or experience relevant to transactions in specific types of financial instruments, the client's or potential client's financial situation including their ability to bear losses, and their investment objectives including their risk tolerance. Fulfilment of these requirements in the WpHG is intended to enable the provider to recommend to the client or potential client financial instruments that are suitable for them and, in particular, are in accordance with their risk tolerance and ability to bear losses. However, the above requirements only apply in those cases where investment advice or financial portfolio management is provided. Yet since the marketing, distribution and sale of binary options generally take place without the provision of investment advice and financial portfolio management via electronic platforms and retail clients thus generally do not receive protection in the form of investment advice and/or financial portfolio management, precisely in the area of high-risk binary options, reliance on section 64 (3) of the WpHG will not provide an adequate alternative in order to address the risks indicated in Art. 42(2)(1)(a) and (b) of MiFIR.

Under section 63 (10) of the WpHG in conjunction with Art. 55 and 56 of Delegated Regulation (EU) 2017/565 (appropriateness assessment), as already set out above in section 2.4, the offer of binary options via electronic trading platforms without the provision of investment advice or financial portfolio management (so-called “advice-free transaction”) requires an assessment of the appropriateness of this financial instrument for the client.

To be sure, for the evaluation of appropriateness it is necessary under section 63 (10) sentence 1 of the WpHG for the investment firms to ask their clients or potential clients to provide information regarding their knowledge and experience relevant to the specific type of products or services offered or demanded so as to enable the provider to determine whether these investment services or products are appropriate for that client. However, financial instruments may nonetheless be traded with this client upon provision of a warning under section 63 (10) sentence 3 of the WpHG, even if the appropriateness assessment has previously determined that the binary option is not appropriate for this client or potential client. Trading with the client is likewise permitted under section 63 (10) sentences 3 and 4 of the WpHG in those cases following a simple warning for the client where the clients or potential clients have previously not provided any information or else have provided insufficient information and an appropriateness assessment is thus not possible. In these cases, it is merely necessary to notify this client accordingly. Binary options qualify as complex financial products and therefore are always subject to the appropriateness test under section 63 (10) of the WpHG. However, in the view of BaFin in the period until ESMA’s Decision (EU) 2018/795 entered into force the investment firms did not generally implement a proper appropriateness assessment under section 63 (10) of the WpHG before retail clients purchased binary options. This has been established through the supervisory work of BaFin as well as other national competent authorities prior to the adoption of ESMA’s Decision (EU) 2018/795.⁵⁹ Even in those cases where no proper appropriateness test has been implemented and where the binary option was generally not appropriate for the retail client and this client is notified accordingly, unlike in the case of this prohibition in many cases this will still not mean that retail clients are prevented from carrying out (advice-free) trading of this complex financial instrument.

There is therefore no adequate alternative means of addressing the above risks and addressing the issue by improved supervision or the enforcement of the existing requirements by means of an effective suitability or appropriateness assessment.

Re. c)
With regard to best execution, most of the best execution rules by themselves already existed under MiFID. These provisions have been strengthened in MiFID II and incorporated into national law through their transposition into the WpHG. In particular, section 82 (1) of the WpHG provides that investment firms must implement “all adequate arrangements” to obtain the best possible result for their clients when executing orders. In addition, under section 82 (9)-(12) of the WpHG in conjunction with Delegated Regulation (EU) 2017/576 and MiFIR market participants must publish additional information on the quality of execution achieved. Investment firms in particular are required to regularly publish for each class of financial instruments the five most important execution venues where they have executed client orders in the previous year as well as a report on the quality of execution achieved.

However, in the view of BaFin, even on the basis of the revised MiFID II rules on the execution of orders on terms most favourable to clients none of the concerns identified in relation to the marketing, distribution or sale of binary options to retail clients are addressed through improved supervision or enforcement of existing requirements for the execution of orders on terms most favourable to clients.

Increased transparency around order execution – in particular, information on how the investment firm executes client orders – does help clients to better understand and to evaluate the quality of the investment firm’s execution practices and thus to better assess the quality of the overall service provided to them. The requirements in relation to best execution also strengthen the best execution standard in relation to OTC products by requiring investment firms to check the fairness of the price proposed to the client when executing orders or taking decisions to deal in OTC products, including bespoke products. However, these requirements are not sufficient in order to eliminate the risks associated with the marketing, distribution and sale of binary options. The same applies for the requirements in the WpHG resulting from MiFID II to gather market data to use for the estimation of the price of such products and, where possible, to compare them with similar or comparable products. These risks were only effectively countered through ESMA’s Decision (EU) 2018/795 of 22 May 2018. Upon expiry of the period of application of the temporary ESMA measure under Art. 40 of MiFIR, these risks would recur unless BaFin addresses them by enacting this general administrative act.

In the context of the existing regulatory requirements, ESMA had repeatedly noted the risks described above in investor warnings⁶⁰, Questions and Answers (Q&As)⁶¹ and its opinion on “MiFID practices for firms selling complex products”.⁶² ESMA had also carried out supervisory convergence work through, inter alia, the Joint Group. Despite ESMA's extensive use of its non-binding instruments to ensure a consistent and effective application of the existing regulatory requirements, the retail client protection concerns persisted until ESMA’s Decision (EU) 2018/795 of 22 May 2018 came into force on 2 July 2018. Since BaFin does not have more extensive (national) supervisory powers in this respect, it is clear that nor can the identified investor protection concerns be dealt with by means of effective application of the existing regulatory requirements on the part of BaFin upon expiry of the period of application of the temporary ESMA measure under Art. 40 of MiFIR.

Re. d)
BaFin has also reviewed whether the product governance rules set out in sections 63 (4) and (5), 80 (9)-(13), 81 (4) of the WpHG and sections 11 and 12 of the WpDVerOV (interpreted in line with BT 5 of the circular 05/2018 (WA)) Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency (Mindestanforderungen an die Compliance-Funktion und weitere Verhaltens-, Organisations- und Transparenzpflichten – MaComp) (as national implementing acts for Art. 16(3) and Art. (24)(2) of MiFID II and Art. 9 and 10 of Delegated Directive (EU) 2017/593)) adequately address the risks indicated in Art. 42(2)(1)(a) of MiFIR and whether the issue would be better addressed by improved supervision or enforcement of the requirements under these rules.

These rules mainly require investment firms which manufacture financial instruments for sale to end clients (manufacturers) to maintain, operate and review a process for the approval of each individual financial instrument and each significant adjustment of existing financial instruments before this financial instrument is marketed or distributed to clients (product approval process). In addition, manufacturers must ensure that the product meet the needs of an identified target market and that the strategy for distribution of the products is compatible with this target market. Manufacturers must also take reasonable steps to ensure that the financial instrument is distributed to the identified target market. Finally, manufacturers must regularly review the financial instruments, in particular the identification of the target market.

According to the product governance rules, investment firms which offer or recommend binary options (distribution companies) which have been manufactured by another company must essentially have appropriate product approval arrangements so as to ensure that the products and services which the distribution company intends to offer or to recommend are compatible with the needs, characteristics and objectives of the specific target market and that the envisaged distribution strategy is suitable for the specific target market. In this sense, distribution companies must identify a target market for distributed financial instruments in terms of their clients while taking into consideration the manufacturer’s target market. If the manufacturer has not identified a target market for a financial instrument, e.g. because it is not subject to the product governance requirements under MiFID II and the WpHG or because this binary option has been manufactured in a third country, then the distribution company must independently identify the target market. Distribution companies must understand the binary options they offer or recommend, assess the compatibility of the binary options with the needs of the client to whom they provide investment services and ensure that binary options are offered or recommended only when it is in the interest of the client.

In identifying a target market for financial instruments, besides other characteristics manufacturers and distribution companies must, in particular, indicate the category of client (retail client, professional client or eligible counterparty) with which the financial instrument is compatible. Considering the features of binary options (high degree of losses, negative expected return, short term of contracts, complexity of pricing structures, and the lack of reasonable investment objectives), BaFin and other national competent authorities as well as ESMA are of the view that retail clients should be excluded when identifying the target market for these financial instruments in terms of the type of client.

In the view of BaFin, following the end of the period of application of the temporary ESMA measure under Art. 40 of MiFIR even if BaFin were to seek to consistently enforce the product governance requirements this is not appropriate in the same way as the prohibition declared through this general administrative act in order to prevent a very high probability of retail clients losing their invested capital through binary options. To be sure, the target market identification outlined above – i.e. excluding retail clients from the positive target market or including retail clients in the negative target market (cf. BT 5.4.1 MaComp) – might prevent the distribution of binary options to retail clients. However, this is an indirect option for influencing distribution which requires the implementation of many interim steps and is thus ultimately not adequate. As a first interim step it would be necessary to require manufacturers and distribution companies to exclude retail clients from the target market accordingly. As a second interim step, it would then be necessary to require distribution companies to take this target market into consideration accordingly in distributing their products. As a third interim step, the affected investment firms would themselves be responsible for verifying implementation and compliance (operations, compliance function, internal audit function). Moreover, in any individual instance BaFin would have to supervise over the course of various further interim steps and, where appropriate, enforce by means of individual measures cooperation between manufacturers and distribution companies in identifying and enforcing the target market in case of a failure of the affected companies to comply independently. In the view of BaFin, following the end of the period of application of ESMA’s measure even in case of implementation of the indirect, step-by-step process outlined above but without the prohibition declared through this general administrative act it would be likely that many retail clients would initially once again purchase binary options and that a very high proportion of these retail clients would thus once again incur significant losses. In the opinion of BaFin, the staggered, indirect process outlined above would only realise its full impact subject to a significant time delay, which would also fall short, to a not inconsiderable extent, of the effect of the prohibition stipulated herein. This prohibition prevents the offer of binary options to retail clients in general. Accordingly, the staggered, indirect process outlined above is not as appropriate as this prohibition, in order to address the outlined investor protection concerns. In view of this and the size of the losses which binary options have caused for retail clients in the past, before ESMA’s measure entered into force, in the opinion of BaFin this indirect staggered approach in each individual case following the end of the period of application of ESMA’s measure does not represent an adequate alternative in order to address the investor protection concerns.

Re. e)
Art. 5 to 14 of Regulation (EU) No 1286/2014, the PRIIPs Regulation (“Packaged Retail and Insurance-based Investment Products”, hereinafter: “PRIIPs”), stipulate disclosure requirements. They lay down uniform rules on the format and content of the key information document to be provided by manufacturers of packaged retail and insurance based investment products to retail clients in order to help them understand and compare the key features and risks of a PRIIP. In particular, Art. 5 of Regulation (EU) No 1286/2014, which has been further concretised in Commission Delegated Regulation (EU) 2017/653, sets out inter alia a methodology for the presentation of the summary risk indicator and accompanying explanations including whether the retail investor can lose all invested capital or incur additional financial commitments. However, this type of disclosure does not sufficiently draw retail clients' attention to the consequences of investing in binary options in particular. For example, the performance ratio only relates to the individual binary option product. The notification obligations under the PRIIPs Regulation naturally always relate to the product. They cannot provide the client with the overall percentage of retail client accounts that lose money. Upon expiry of the period of application of ESMA’s measure, a regulatory solution which is based on the enforcement of the product notification obligations for investor protection alone will not be sufficient for binary options, which are in themselves already unsuitable for retail clients.

 
Re. f)
Nor was it possible to address the significant investor protection concerns even before ESMA’s Decision entered into force by means of BaFin temporarily prohibiting professional activity, for instance, by virtue of its supervisory powers within the scope of Art. 69 of MiFID II, transposed into national law inter alia through section 6 (8) of the WpHG. BaFin is permitted, e.g. under section 6 (8) of the WpHG, to prohibit a person employed by a company supervised by BaFin from pursuing their professional activity for a period of up to two years if this person has intentionally violated one of the rules laid down in section 6 (6) sentence 1 numbers 1 to 4 and 6 of the WpHG or an order issued by BaFin relating to these rules and continues to behave in this way despite a warning from BaFin. However, this prohibition of professional activity is once again only possible indirectly, following several previous interim steps. In addition, binary option providers are frequently already not “supervised undertakings” within the meaning of section 6 (8) of the WpHG. Nor do BaFin’s other supervisory powers through the transposition of Art. 69 of MiFID II enable it to effectively address the outlined significant investor protection concerns.

In the view of BaFin, before ESMA’s Decision entered into force nor was it possible to avoid these significant investor protection concerns by means of cumulative enforcement of the requirements listed under a) to f) above in the same way. In the opinion of BaFin, the same situation would apply upon expiry of the period of application of the temporary ESMA measure under Art. 40 of MiFIR.

In the view of BaFin, upon expiry of ESMA’s measure no adequate alternative is thus available in order to address the risks indicated in Art. 42(2)(1)(a) of MiFIR and address the issue by means of improved supervision or enforcement of the existing requirements. Following the end of the period of application of the temporary ESMA measure under Art. 40 of MiFIR, this prohibition is thus necessary in order to address the outlined significant investor protection concerns.

II. Use of discretionary power

I have used the discretionary power granted to me under Art. 42(1) of MiFIR in order to enact the above measure. This measure is proportionate, since it is suitable, necessary and appropriate.

1. Suitability of the prohibition

The prohibition of the marketing, sale and distribution of binary options to retail clients is suitable in order to achieve the legitimate purpose pursued through the measure. The prohibition addresses the significant investor protection concerns arising due to the above-mentioned grounds, since the marketing, distribution and sale of binary options to retail clients in Germany will no longer be permitted – aside from the exemption provided for in the operative provisions – following the end of the period of application of the temporary ESMA measure under Art. 40 of MiFIR.

2. Necessity of the prohibition

The prohibition is also necessary, as specified in the operative provisions, following the end of the period of application of the temporary ESMA measure under Art. 40 of MiFIR. A more lenient course of action which would be equally suitable in order to eliminate the significant investor protection concerns is not available to me.

In principle, an intensification of binary option providers’ activities clarifying for retail clients, in general, the risks associated with trading is conceivable as a more lenient course of action. However, it is not equally suitable in order to achieve this purpose. In particular, it would not do anything to change retail clients’ very high loss rates, as indicated above. In many cases, the intensification of risk notification activities would not have a direct impact and, if at all, would only have an effect after a certain period of time. It is also questionable whether this would reach all of the retail clients involved. Upon expiry of the period of application of the temporary ESMA measure under Art. 40 of MiFIR, many retail clients would thus once again lack protection, possibly permanently. An intensification of binary option providers’ activities clarifying the risks for retail clients is thus not viable as a more lenient, equally suitable course of action.

Nor would a mere obligation to disclose general loss and profit figures for binary option transactions, within the scope of a warning for retail clients addressed to potential retail clients, do anything to change the above-mentioned high number of investors investing in binary options and the related high number of binary option trades made by these investors or the losses associated with these trades. According to the observations of BaFin based on its ongoing monitoring of the market, the websites of the binary option providers – which (also) operate in Germany, but none of which are established in Germany – include risk notices in German, or at least in English. Almost all of the monitored providers also point out the risk of a total loss of the capital invested, and the great majority of these providers moreover point out the highly speculative nature of this financial instrument. However, in the period prior to the entry into force of ESMA’s Decision (EU) 2018/795 on 2 July 2018 this did not affect the number of binary option investors, the related high number of trades made by these investors or the losses associated with these trades. Nor would BaFin expect a publication beyond the scope of these risk notices – even including the general loss and profit figures – to affect in the same way as this general administrative act the number of investors in binary options, the related high number of trades made by retail clients or the losses associated with these trades, which amounted to between 74 and 87% prior to the adoption of ESMA’s Decision (EU) 2018/795. In any case, nor would the mere obligation to disclose general loss and profit figures following the end of the period of application of the temporary ESMA measures under Art. 40 of MiFIR have a direct impact. If at all, this would only have an effect after a certain period of time. Moreover, it is also likely in this respect that a significant proportion of these retail clients would not even read the notice regarding these loss rates. On these grounds, an obligation to disclose the general loss and profit numbers, by way of a warning for retail clients, upon expiry of the period of application of the temporary ESMA measure under Art. 40 of MiFIR does not appear to be as suitable as BaFin’s envisaged general administrative act in order to address the significant investor protection concerns identified.

As indicated in detail in section A. IV. above, national competent authorities and institutions in other EU Member States had already implemented a series of measures relating to the marketing, distribution or sale of binary options to retail clients even before ESMA's Decision 2018/795 entered into force on 2 July 2018. For instance, IT-CONSOB (February 2017), the National Central Bank of the Czech Republic (CZ-CNB; October 2015) and AT-FMA (December 2016) had already issued warnings. On 25 July 2016, ESMA had also published its own warning regarding binary options and other speculative products, which was also approved by BaFin as an ESMA member.⁶³ None of the warnings issued had an adequate impact on binary option trading, which is why ESMA finally adopted its Decision (EU) 2018/795 on 22 May 2018. However, a similar (further) warning issued by BaFin in Germany upon expiry of the period of application of the temporary ESMA measure under Art. 40 of MiFIR would not be suitable in order to eliminate the significant investor protection concerns outlined above. As already set out above, not even the providers’ extensive posting of notices on their websites regarding the risk of a total loss prior to the adoption of ESMA’s Decision (EU) 2018/795 on 22 May 2018 has affected the continuously high numbers of trades and loss rates for investors.

Before adopting its Decision (EU) 2018/795 on 22 May 2018 ESMA likewise examined less restrictive measures such as an obligation to sell and distribute these products subject to the provision of advice. However, the products prohibited in the above operative provisions at any rate are not suitable for retail clients, on account of their characteristics. In particular, due to the generally very short term of binary options of just a few seconds or just a few minutes, as set out above, an obligation to sell and distribute binary options subject to the provision of advice upon expiry of the period of application of the temporary ESMA measure under Art. 40 of MiFIR is not conceivable as a more lenient, equally suitable course of action. Nor would improved supervision of compliance with the product governance requirements under MiFID II prevent retail clients from being offered financial instruments such as binary options which are unsuitable for them, since this would have a purely repressive effect. In contrast, the prohibition stipulated herein already has a preventative effect and thus avoids the possibility of retail clients being offered binary options at all. For this reason, too, stronger supervision of compliance with the product governance requirements under MiFID II is not appropriate as a more lenient course of action.

Another measure already considered by ESMA is (merely) to set a minimum term for binary options. However, this type of specific restriction regarding the minimum term of binary options would not on its own dispel the key concerns in relation to this product. Accordingly, a limitation of the minimum term alone does not represent an equally suitable, but more lenient course of action. In particular, the problematic pricing structure of the product which means that, on average, investors will experience negative expected returns without receiving any clear compensating benefits (such as the hedging function served by conventional (non-binary) options) and the identified conflicts of interest between retail clients and binary option providers would persist. Accordingly, upon expiry of the period of application of the temporary ESMA measure under Art. 40 of MiFIR merely imposing a minimum term for binary options in regard to their marketing, distribution and sale to retail clients would not on its own/as a single measure be sufficient as a more lenient, equally suitable course of action.

However, this general administrative act does not completely prohibit the marketing, distribution and sale of binary options to retail clients. No. 3 of its operative provisions exempts from this prohibition binary options for which much of the outlined significant investor protection concerns are not applicable. No. 3 of the operative provisions of this general administrative act exempts from the scope of the prohibition binary options which have a sufficiently long term of not less than 90 days, for which a (securities) prospectus has been prepared and approved and which are moreover fully hedged by the provider or another entity in the provider's group. An example of this kind of securitised binary option is an “inline warrant” that cumulatively meets these conditions.

While the degree of complexity for this type of binary option is comparable with other binary options in general, as outlined above the requirement of a minimum term of 90 days ameliorates the negative effects of complexity and opacity for investors, even if it alone does not eliminate them entirely. Investors can more easily acquire an informed overview of the market for a period of 90 days or longer from the date when the product was first issued than over the very brief terms which typically apply for binary options. Moreover, a term of 90 days or longer reduces the scope for frequently-repeated speculative trades which, as outlined above, will very likely result in high losses for the retail client and are associated with addictive behaviour.

Moreover, the conflicts of interest set out in section B. I. 2.2 will be significantly reduced if the hedging activity in relation to a binary option is carried out by the provider or by another entity in the provider's group and if no profit or loss is made on the binary option by the provider or by another entity in the provider's group other than previously disclosed commissions, transaction fees and related charges. In particular, the net profit derived from the binary option is not substantially determined by whether it pays out or not. Hedged providers of binary options under no. 3 of the operative provisions of this general administrative act are thus not incentivised to misreport underlying prices or to speculate against the client.

The requirement of the exemption from the prohibition set out in no. 3(b) of this general administrative act – that only binary options for which a prospectus has been prepared and approved in accordance with the WpPG or a similar statutory regulation of another Member State of the European Union or Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 July 2017 may be marketed, distributed and sold to retail clients – safeguards a minimum level of transparency. This ensures that in case of the marketing, distribution or sale of binary options exempted from this prohibition retail clients are provided with prescribed information on the provider, including its business model and financial statements as well as the risks associated with the product and its characteristics.

Only the cumulative fulfilment of the preconditions of an approved prospectus, a sufficiently long term and full hedging by the provider or its group entity in case of a binary option will eliminate much of the significant investor protection concerns outlined here upon expiry of the period of application of the temporary ESMA measure under Art. 40 of MiFIR. A prohibition of these products would thus not be proportionate. For this reason, they are exempted from the scope of this prohibition.

3. Appropriateness of the measure (proportionality in the narrower sense of the term)

The prohibition of the marketing, distribution and sale of binary options to retail clients as stipulated in the operative provisions is also appropriate upon expiry of the period of application of the temporary ESMA measure under Art. 40 of MiFIR.

This prohibition addresses these concerns by affording an appropriate and uniform level of protection to retail clients trading binary options in Germany. It does not have any detrimental effects on the efficiency of financial markets or on providers or investors that is disproportionate to its benefits.

The various concerns must be weighed against one another by considering all of the affected interests.

In particular, the scope and the nature of the significant investor protection concerns identified, the level of sophistication of the affected investors or market participants and the probable effect of the measure on investors and market participants must be considered in weighing up these concerns.

As set out in section B. I. 2.1, calculation of the price trend for binary options is highly complex and is not in keeping with the typical level of sophistication of retail clients.

Before adopting its Decision (EU) 2018/795, ESMA analysed the distribution of investor returns in order to assess how and the degree to which binary options pose a risk to investor protection.⁶⁴ This analysis identified two important features. The first important feature is the high level of risk involved in binary options: a general feature of binary options is that the investor stands to lose the entire amount invested.

The second feature, the negative expected return on the product, is an important source of detriment in this context and applies to all binary options except for binary options within the meaning of no. 3 of the above operative provisions, which are not covered by this prohibition. Unlike other financial investments, the binary options covered by this prohibition are typically very short term and do not offer participation in the growth in value of the underlying. Unlike conventional options, which are often used for hedging purposes, binary options provide a fixed payoff if a specified event occurs. In contrast, the payoff of a typical (non-binary) option is contingent on the change in the price of the underlying once the option is in the money (that is the payoff is variable). This inherent feature of binary options limits the value of the product as a hedging tool. On the other hand, non-binary options can be used in order to hedge the risk associated with other types of investment, so as to minimise the overall level of investment risk with regard to all of an investor’s investments.

Furthermore, the typically short term of the binary options covered by the prohibition enables and tempts an investor to place many trades sequentially. This combined with the negative expected return results in an increasing likelihood of an investor losing on a cumulative basis the more trades placed. This is a statistical property of repeated negative expected return trading.

Importantly, the negative-expected return is generally integral to the business model of a provider, as it is generally the source of their expected profits. A binary option obliges the option provider to pay the investor a fixed amount if a specified event happens, so for the provider to make an expected profit, the investor must make an expected loss. The profit which the binary option provider realises from the trading/sale of the binary option is the mirror image of the investor’s loss. Moreover, for every trade providers can charge further fees which do not depend on the performance of the binary option over its term.

Specifically for binary options offered with continual two-way pricing, as the provider will need to offer pricing allowing them to make an expected profit, the provision of this pricing cannot improve expected returns for the investor. Indeed, to the extent investors exit positions before expiry, their expected return is lower than if they hold the position to expiry. The magnitude of this incremental expected loss will vary from provider to provider and case to case, but the expected result for an investor implied by the two-way pricing must typically be negative, just as a product's initial price will imply a negative expected return for the investor.

The combined effect illustrates an essential element of binary options due to their negative expected returns: if the retail client makes a very large number of investments, or if a very large number of investors each make a single investment, the probability of the investor(s) making a profit overall is very low.

The analysis of the return distribution of binary options correlates with the data gathered by BaFin and other national competent authorities up to the date of the adoption of ESMA’s Decision (EU) 2018/795 on 22 May 2018. These features are also combined with a general complexity and lack of transparency related to the product features of binary options, poor marketing and distribution practices and inherent conflicts of interest. These key disadvantages are not offset by advantages compensating for these disadvantages. Collectively, the above-mentioned characteristics represent significant risks which have a negative impact on current and potential retail clients and which justify an intervention in the interest of collective consumer protection.

The public interest in the far-reaching restrictions on the marketing, distribution and sale of binary options, as provided for in the operative provisions of this general administrative act, outweighs the economic interest of the affected binary option providers in the marketing, distribution and sale of binary options as well as the individual interest of retail clients in the purchase of binary options.

This general administrative act has consequences for the economic interest of binary option providers in the marketing, distribution and sale of binary options to retail clients. Affected providers may lose an area of business as a result of this general administrative act which previously offered them a lucrative source of income and/or they will be unable to resume business upon expiry of the period of application of the temporary ESMA measure under Art. 40 of MiFIR. However, it should be noted in this respect that no. 3 of the operative provisions of this general administrative act exempts binary options with certain characteristics from the scope of this prohibition and thus does not completely forbid the marketing, distribution and sale of binary options to retail clients. Furthermore, the binary options covered by this prohibition may still be distributed to professional investors within the meaning of Art. 4(1)(10) of MiFID II.

Moreover, a principal reason why the financial sector is highly regulated is that it serves important overarching interests and objectives. The legislature attaches a high priority to the protection of investors. Special attention in this context is devoted to the protection of retail clients. The marketing, distribution or sale of a financial instrument assumes that a product is able, at least potentially, to serve these overarching interests and objectives and does not put at risk in a disproportionate way the need to ensure a minimum level of investor protection. In participating in the capital market, the typical retail investor is primarily pursuing the goal of capital formation. This essentially involves savings and investments.

Until ESMA’s prohibition entered into force through its Decision (EU) 2018/795 on 2 July 2018, binary option providers mainly marketed, distributed and sold their products as speculative investment opportunities and not as a means of participating in chance-based gambling. Risk warnings from binary option providers did notify retail investors in most cases that they should consider their investment to be risk capital. Nonetheless, binary options were marketed as participating in the trends on the capital market due to their link to the prices of actual underlyings. For the average retail client, this was a speculative investment rather than a bet whose prospects are a matter of chance and also highly susceptible to manipulation.

However, the significant investor protection concerns outlined above clearly show that, for a retail client, as with gambling it is generally a matter of chance whether they will achieve a financial success with binary options. The probability of this is low. Apart from this, the exemptions in no. 3 of the operative provisions of this general administrative act mean that the distribution, marketing and sale of binary options is not completely impossible for providers. This general administrative act does not restrict their distribution, marketing and sale to professional investors.

For these reasons, the economic interest of binary option providers appears to warrant less protection than the public interest in collective consumer protection and must take second place due to the significant investor protection concerns outlined.

The effects of this prohibition on retail clients are also proportionate.

To be sure, retail clients have a legitimate interest in themselves making an autonomous decision on the basis of their specific circumstances and financial position as to whether binary options are a suitable investment for them. This autonomy was already restricted through ESMA’s temporary measure and upon expiry of the period of application of this measure it will also be restricted through the prohibition enacted through this general administrative act, since this limits retail clients’ freedom of action. However, this restriction resulting from the prohibition enacted through this general administrative act is proportionate.

The public interest in ensuring consumer protection outweighs the interest of individual retail clients in trading binary options which the operative provisions do not exempt from this prohibition. Individual retail clients are not completely denied access to binary options. The marketing, distribution and sale of binary options which are exempted from this prohibition in no. 3 of the operative provisions of this general administrative act are also reasonable from the point of view of consumer protection, since most of the significant reservations outlined do not apply for these binary options.⁶⁵ Professional clients within the meaning of Art. 4(1)(10) of MiFID II are not affected by the prohibition in this general administrative act and thus continue to have unrestricted access to binary options.

The increased cost and effort for the binary options exempted from this prohibition (costs due to the preparation of a prospectus etc.) may give rise to increased product costs, which will possibly be passed on to investors. However, a product intervention inevitably restricts or affects investment opportunities to a certain degree. Moreover, there is no right to low-cost securities transactions and particularly not to low-cost speculation opportunities on the basis of such securities transactions. In introducing Art. 42 of MiFIR, the European legislature was aware that a product intervention might have such consequences. Nonetheless, the national competent authorities – thus including BaFin – were to be provided with such a possibility of intervention by means of the newly introduced Art. 42 of MiFIR in case of significant investor protection concerns.

Moreover, the following benefits gained from addressing the investor protection concerns identified outweigh the potential negative impact of the measures:

a) reduction of the mis-selling risk and its related financial consequences, which is a major benefit for retail clients and for the financial markets as whole;

b) reduction of risks linked to regulatory or supervisory arbitrage across different entities and jurisdictions and

c) restoring or maintaining retail clients' confidence in the financial markets.

Overall, the interest of the retail client in the unrestricted use of binary options takes second place behind the public interest in the prohibition of this financial instrument, as provided for in the operative provisions.

The likely effects of this prohibition on other market participants are also proportionate.

This administrative act relates to an isolated market segment. A significant impact on the financial sector as a whole on account of this administrative act can already be ruled out, since such an impact did not arise during the period of application of ESMA’s Decision (EU) 2018/795, from 2 July 2018 up to and including 1 October 2018. A prohibition of the marketing, distribution and sale of binary options which is identical to this general administrative act already applied in this period, but this did not include any exemption and was thus more intrusive than this measure.⁶⁶ A relevant impact on other capital markets has not been noted either in Germany or in the European Union. For this reason, a significant impact on the financial sector as a whole due to the enactment of this measure can be ruled out. This general administrative act merely follows on from the legal situation prevailing since the entry into force of ESMA’s Decision (EU) 2018/795 on 2 July 2018 up to and including 1 October 2018 and keeps this in place, but attenuated by the exemption provided for in no. 3 of these operative provisions. The level of interdependence of the market for binary options and other capital markets is limited, and so too is the impact on stock exchange trading. Moreover, unlike in the period from 2 July 2018 up to and including 1 October 2018, the exemption stipulated in no. 3 of the operative provisions of this general administrative act provides market participants with the option to continue to trade binary options subject to certain preconditions.

The measure is thus appropriate even after considering and weighing up all of the affected interests.

III. No discrimination (Article 42(2)(e) of MiFIR)

This general administrative act will not have a discriminatory effect on services or activities which are provided from another Member State.

IV. No serious threat to the physical agricultural markets (Article 42(2)(f) of MiFIR)

Art. 42(2)(f) of MiFIR requires a proper consultation of the public bodies competent for the oversight, administration and regulation of physical agricultural markets under Regulation (EC) No 1234/2007 where a financial instrument or activity or practice poses a serious threat to the orderly functioning and integrity of the physical agricultural market, prior to a product intervention by BaFin.

Before adopting its above-mentioned Decision of 22 May 2018, ESMA had consulted all of the public bodies competent for the oversight, administration and regulation of physical agricultural markets under Regulation (EC) No 1234/2007 (1). ESMA received responses from the Federal Ministry of Food and Agriculture (Germany), the Ministry of Agriculture (Latvia) and the Ministry of Agriculture and Forestry (Finland). None of those questioned raised any objections to the prohibition of the marketing, distribution and sale of binary options to retail clients throughout the European Union as proposed by ESMA. ESMA’s Decision (EU) 2018/795 of 22 May 2018, applicable in the period from 2 July 2018 to 1 October 2018, fully included the prohibition provided for in this general administrative act for the above-mentioned period of time.⁶⁷ In the period from 2 July 2018 to 1 October 2018, neither ESMA nor BaFin has learned of facts pointing to a serious threat to the orderly functioning and the integrity of the physical agricultural markets. In the view of BaFin, in the absence of facts to the contrary nor can a threat to the orderly functioning and the integrity of the physical agricultural markets be assumed to apply for the period after 1 October 2018. As before, there are no apparent grounds for such a threat, so that the public bodies competent for the oversight, administration and regulation of physical agricultural markets under Regulation (EC) No 1234/2007 (1) are not likely to raise any objections and a consultation under Art. 42(2)(f) of MiFIR was not necessary.

V. No implementation period required

It is not necessary to grant a period for implementation.

As already outlined above in section VI. 2., prior to the adoption of this general administrative act, in the period from 2 July 2018 up to and including 1 October 2018 a prohibition was applicable that was likewise mandatory for providers and which stipulated a prohibition of the marketing, distribution and sale of binary options to retail clients without any exemptions and went beyond the operative provisions of this general administrative act.

In the period from 2 July 2018 up to and including 1 October 2018, ESMA’s extended prohibition thus already included the prohibition enacted by BaFin through this general administrative act and (also) applied in the Federal Republic of Germany, as a Member State of the European Union. The providers were thus already required to implement ESMA’s prohibition in the period from 2 July 2018 up to and including 1 October 2018 in Germany (as well as other countries). Even thereafter, in the period from 2 October 2018 up to this general administrative act coming into effect, an ESMA prohibition applied in regard to the marketing, distribution and sale of binary options to retail clients which was equivalent to the operative provisions of this general administrative act. In the view of BaFin, it must therefore be possible for the providers to comply with the prohibition declared in this general administrative act without the grant of a period for implementation.

Notices:

This general administrative act is to be published in accordance with Art. 42(5) of MiFIR.

Under section 15 (2) of the WpHG, an objection or an action for rescission brought against measures under Art. 42 of MiFIR will not have any suspensory effect.

I wish to point out that, under section 120 (9) no. 30 of the WpHG, intentional or reckless failure to comply with an enforceable order in accordance with Art. 42(1) of MiFIR constitutes an administrative offence.

Instruction on available remedies:

An objection to this general administrative act may be submitted to BaFin in Bonn or Frankfurt am Main within a period of one month of its announcement.

Elisabeth Roegele

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