The EU markets regulator has just banned "risky" binary options

In an effort to protect retail investors, the EU markets regulator has this morning banned binary options and restricted contracts for differences (CFDs).

Binary options essentially allow an investor to "win" a lump of cash if the value of an agreed underlying asset is above a certain price at the preset time the option expires.

CFDs allow investors to bet on the underling price movements of an asset without actually having to own it. But because they are leveraged contracts with a broker, the amount an investor could lose if the value of the asset falls is much larger.

The European Securities and Markets Authority (Esma) has said from now on, binary options cannot be distributed to retail investors at all. The restrictions on CFDs will include:

Leverage caps, which are especially tight on cryptocurrencies
Standardising a "close-out" level at 50 per cent of the required margin for each account so investors cannot lost massive amounts of money
Negative balance protection, providing a guaranteed limit on losses
Preventing CFD providers from incentivising customers to trade more, and
A standardised risk warning.

"The new measures on CFDs will for the first time ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide risk warning for investors," said Esma chair Steven Maijoor.

"The combination of the promise of high returns, easy-to-trade digital platforms, in an environment of historical low interest rates has created an offer that appeals to retail investors. However, the inherent complexity of the products and their excessive leverage – in the case of CFDs – has resulted in significant losses for retail investors."

The UK's Financial Conduct Authority has said it "supports Esma’s application of EU-wide temporary product intervention measures", and will consult on whether these should be applied permanently.

Shares in companies which offer binary options and CFDs were mixed in early trading – IG Group was down 1.41 per cent, while Plus500 was up by around the same amount and CMC Markets had risen 0.38 per cent.

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