The watchdog’s decision is based on findings that suggest that binary options have caused significant losses for retail clients.
In fact, ASIC reviews in 2017 and 2019 found that approximately 80 per cent of retail clients lost money trading binary options because of the nature of these financial products, including their ‘all or nothing’ payoff structure, their short contract duration, and negative expected returns.
As such, as of 3 May, the issue and distribution of binary option to retail clients will be banned.
According to commissioner Cathie Armour, “Binary options’ product characteristics make them incompatible with investment or risk management use by retail clients.”
“ASIC’s product intervention order will protect retail investors from these harmful products at a time of heightened vulnerability,” the commissioner clarified.
Following ASIC’s warning in April 2019 against providing unlicensed or unauthorised services to clients located in several foreign jurisdictions, the size of the binary market in Australia is believed to have reduced significantly.
Australian retail clients are estimated to have made net losses of more than $6.7 million in 2019, compared with $490 million in 2018.
ASIC’s binary options ban brings Australian requirements into line with prohibitions in force in comparable markets and follows the commencement on 29 March 2021 of ASIC’s product intervention order imposing conditions on contracts for difference offered to retail clients.
The order will remain in force for 18 months, after which it may be extended or made permanent. Civil and criminal penalties apply to contraventions of the product intervention order.
What is a binary option?
A binary option is a cash-settled, over-the-counter (OTC) derivative entered into by two counterparties – the binary option issuer and the client.
The ‘all-or-nothing’ payout under a binary option contract is determined by the occurrence or non-occurrence of a specified event in a defined time frame. This can include an event related to movements in the price of a financial product or a market index or an economic event.
