ESMA’s 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.

What are Event Contracts

Event contracts exist for a wide variety of event questions, covering financial instruments, sports, entertainment, weather, and more. Whether they qualify as financial instruments depends on the event question – i.e. is the “event” a financial related instrument. 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.

Ban on binary options

National product intervention measures on binary options have been adopted by national EU regulators in the respective jurisdictions. These national measures reflect the original temporary measures adopted by ESMA in 2018. The ESMA Decision included a definition of binary options for the specific purpose of the financial instruments affected by that decision.

In this context, the commercial name provided by firms (e.g. “event contracts”) is irrelevant for the categorisation under MiFID II of products distributed, marketed or offered to clients, and firms must conduct a careful legal analysis of these products and their functioning, in order to check whether they may fall within the scope of application of product intervention measures.

ESMA said that firms must conduct this careful legal analysis by adhering at all times to the overarching obligation to act honestly, fairly and professionally in accordance with the best interests of clients, to which they are bound.

Consequently, as event contracts with a binary outcome and binary pay-out are likely to be derivatives that are financial instruments, they are likely to fall in scope of the product intervention measures. In some cases, an investor may receive a ‘coupon’ or ‘reward’ representing the interest earned on the funds paid. The existence of such ‘coupon’ or ‘reward’ does not change the binary nature of the event contract itself.

MiFID authorisation required for distribution to non-retail clients

Being financial instruments, ESMA also reminded firms that the provision of investment services and activities concerning financial instruments in the EU requires an authorisation in accordance with MiFID II, irrespective of the category of clients to whom services are provided. As a consequence, the distribution of such event contracts even only to non-retail clients requires this authorisation.