ASIC has made a product intervention order banning the issue and sale of binary options to retail clients, after they were estimated to cause losses close to half a billion dollars in 2018.
The ban will take effect from Monday, 3 May, after the corporate watchdog concluded that binary options have resulted in and are likely to result in significant detriment to retail clients.
ASIC reviews in 2017 and 2019 found that approximately 80 per cent of retail clients lost money trading binary options. The regulator estimated that retail clients’ net losses from trading binary options were around $490 million in 2018.
But, the size of the market had reduced significantly, after ASIC issued a warning in April 2019, cautioning against providing unlicensed or unauthorised services to clients located in foreign jurisdictions.
Australian retail clients are estimated to have made net losses of more than $6.7 million in 2019.
ASIC has also now ruled that binary options are likely to result in cumulative losses to retail clients over time because of their product characteristics.
Binary options have an “all or nothing” pay-off structure, where one of the two possible outcomes for a contract is that the retail client will lose their entire investment amount. They also have a short contract duration, with the average period traded with one provider less than six minutes.
ASIC also found negative expected returns (that is, the present value of the expected pay-off for a binary option contract is lower than the initial investment).
Commissioner Cathie Armour commented the product characteristics make binary options 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,” Ms Armour said.
The product ban will bring Australian requirements in line with comparable markets. It has followed another product intervention order imposing conditions on contracts for difference offered to retail clients.
Civil and criminal penalties apply to contraventions of the CFD product intervention order, which will remain in force for 18 months.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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