The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, has issued a statement reminding firms of their obligation to assess whether newly offered products fall within the scope of existing product intervention measures on binary options.
The statement responds to the growing popularity of prediction markets - or event contracts - and increasing retail participation globally. Event contracts are products whose financial outcome is binary (a fixed payout or no payout at all) and depends on a yes-or-no answer to a question about a future event. Event contracts exist for a wide variety of event questions. Whether they qualify as financial instruments depends on the event question. Event contracts may (also) qualify as bets under national gambling legislation.
Where event contracts are financial instruments, they classify as derivatives and, given the binary outcome, fall within the scope of the existing national product intervention measures on binary options adopted by national competent authorities prohibiting their marketing, distribution or sale to retail clients.
The statement also reminds firms that the distribution of event contracts qualifying as financial instruments in the EU requires an authorisation as investment firm, even where only distributed to non-retail clients.
