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ID 1095. Definitions Back

Relevant provisions

Annex I , Section C of Directive 2004/39/EC

Question

Is the trade of Binary Options an activity regulated under MiFID? Do Binary Options fall within the definition of financial instruments under MiFID?

Scenario: Binary Options are typically offered to clients (retail and professional) via a platform where clients can trade binary/digital options in a number of underlying products (e.g. oil, gold, indices, currencies, stocks etc). These binary options are private contracts between the client and the Investment Firm – not traded anywhere else – and are settled in cash. Through these binary options, Clients can speculate on which direction the price of an underlying product will move within a specified time frame. When a binary option is purchased on the Investment Firm's platform, a contract is created which pays some fixed amount of cash if the option expires in-the-money or nothing if the option expires out-of-the-money.

A brief example is when a client wishes to enter into a Microsoft binary option by investing an amount of €100, with the view that at the end of the day (time of expiration) Microsoft’s shares will be higher than they currently stand (i.e. a call binary option). If Microsoft’s shares at the end of the day are higher than at the time the binary option was purchased then the Binary Options Trading Company will offer a return on the Client’s investment (e.g. 70%). If Microsoft’s shares at the end of the day are lower than at the time the binary option was purchased then the client loses his entire (or part of) investment (i.e. a negative return on investment).

Answer

Point (4) of Section C of Annex 1 to Directive 2004/39/EC lists the financial instruments covered by this Directive. This list clearly covers, among others, any derivative contracts relating to securities, currencies, interest rates or yields, or other derivative instruments (point (4) of Section C Annex I) as well as derivatives relating to commodities that are settled in cash or that can be physically settled provided they have the characteristics of other derivative financial instruments (points (5) (6) and (7) of Section C Annex I and Article 38 of the Implementing Regulation No 1287/2006).

As the binary option you are referring has the features of a derivative contract settled in cash (cf Articles 37 and 38 of the Implementing Regulation No 1287/2006), such binary products appear to meet the definition of ‘financial instruments’ laid down in Section C of Annex I to MiFID. Therefore, companies offering investment services and activities in these binary options should be authorised as investment firms under MiFID.



Date

Submitted on 23/01/2012

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Asset management
Capital Requirements Directives (CRD)
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