The German Federal Financial Supervisory Authority (the Bundesanstalt für Finanzdienstleistungsaufsicht or BaFin) is planning to prohibit the marketing, distribution and sale of binary options to HNW/retail clients as part of national regulations. For this purpose, it has published the draft version of a general administrative act.

The German supervisor is therefore already preparing for the expiry of the 'product intervention' measure that the European Securities and Markets Authority (ESMA) imposes every three months and will, by German calculations, probably go on imposing. The act (not a piece of legislation but a rule that BaFin can revoke on its own account) is available only in German.

BaFin’s Chief Executive Director, Elisabeth Roegele, explained: “Especially in the current environment of low interest rates, binary options are a particularly tempting option for retail clients. They can be traded on easily accessible online platforms and promise high returns. However, experience shows that these products generate extremely high losses for retail clients and pose very high risks.”

In particular, BaFin thinks that binary options are risky for HNWs and other retail consumers because they are complex and opaque. It proclaims: "This is particularly true of the calculation of their performance as well as the underlying. Unlike other financial instruments, binary options are also not traded on a market where prices result from supply and demand. Instead, it is the provider who determines the price, without its clients being able to understand or examine this."

Due to the generally extremely short terms, it is exceedingly difficult for retail clients to assess the risk-return profile of a binary option. Moreover, binary option providers generally act as direct counterparties to their clients’ trades. The interests of providers are therefore in direct conflict with those of their clients. For instance, a provider could manipulate the price of the 'underlying' at the expiry of the binary option or change the term of that option by seconds or milliseconds, so as to avoid having to pay out on the option contract.

The marketing, distribution and sale of binary options to retail clients is already prohibited in the European Union by ESMA's temporary measure. BaFin’s envisaged act will maintain this prohibition once ESMA’s measure expires.

The planned general administrative act has been published on BaFin’s website. Written responses may be submitted until 20 December.