Select a legislative/policy area

ID 955. Definitions (Internal reference 332) Back

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

Question
Recently we have seen, in certain EU jurisdictions, the flourish of several Binary Options Trading Companies. Very briefly, these Binary Options Trading Companies typically offer their Clients (retail and professional) a platform where they 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 Binary Options Trading Company – not traded anywhere else – and are settled in cash.

Based on the above, do you believe that the binary options offered by these Binary Options Trading Companies fall under the scope of MiFID’s financial instruments and therefore these companies need to obtain an Investment Firm authorisation/license, assuming that all other relevant conditions are met?

Answer

Point (4) of Section C of Annex 1 to Directive 2004/39/EC lists the instruments covered by this Directive. This list clearly covers all derivatives relating to securities, currencies, interest rates or yields (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 to is a derivative contract settled in cash, it seems that these meet the definition of financial instruments. Therefore, companies offering investment services and activities in these binary options should be authorised as investment firms under MIFID./p


Date
Submitted on 17/09/2010