The ESMA prediction markets ban is not new law: it is old law applied to new packaging. The European Securities and Markets Authority (ESMA) issued a public statement on 3 July confirming that products branded as “event contracts” may still fall under the EU’s existing prohibition on binary options for retail clients, regardless of what a firm chooses to call them.
Old Rules, Rebranded Products
ESMA defines event contracts as agreements with a binary financial outcome: either a fixed payout or nothing, depending on a yes-or-no answer to a question about a future event. The regulator is clear that the commercial name attached to such a product has no bearing on how it is categorised under MiFID II (the EU’s main markets legislation, covering investment services and instruments).
Where an event contract’s underlying question relates to matters covered by MiFID II, ESMA says it qualifies as a derivative. As a derivative, it falls within national product intervention measures that ban its marketing, distribution or sale to retail clients across all EU member states.
Those national rules replaced a temporary EU-wide prohibition that ESMA first introduced in the summer of 2018. ESMA formally adopted that original decision on 22 May 2018, with the ban taking effect from 2 July 2018 under ESMA Decision (EU) 2018/795. The authority then renewed the binary options prohibition for a further three months from 2 October 2018, also excluding a limited number of products from that renewal’s scope, before permanent national rules took over.
The legal foundation for those powers sits in Article 40 of Regulation (EU) No 600/2014, known as MiFIR, which grants ESMA its product intervention authority. ESMA had signalled its intention to use those powers as far back as December 2017, when it published a consultation on potential CFD and binary options measures ahead of the formal decision.
What the ESMA Prediction Markets Ban Actually Covers
The 3 July statement sets out three things firms must keep in mind.
First, the substance of a product determines its classification, not its label. Firms must carry out a careful legal analysis of a product’s structure and functioning. ESMA reminds them of their obligation to act “honestly, fairly and professionally in clients’ best interests.”
Second, a “coupon” or “reward” feature representing interest earned on funds deposited does not alter the product’s classification. If the underlying contract is binary in nature, the presence of an interest component does not change that.
Third, the authorisation requirement applies even to firms that only serve non-retail clients. Offering investment services involving financial instruments in the EU requires authorisation under MiFID II regardless of the client category. Event contracts that qualify as financial instruments are not exempt simply because they are aimed at professional or institutional counterparties.
MiCA and Gambling Law: The Other Exits
Not every event contract will fall under MiFID II. ESMA acknowledges that some may be classified as bets under national gambling legislation rather than as financial instruments. Where an event contract takes a tokenised form and does not qualify as a financial instrument, it may instead fall under the Markets in Crypto-Assets Regulation (MiCA), the EU’s crypto-asset framework.
Neither route sidesteps oversight. It simply routes the product to a different regulator or legislative framework.
ESMA also warned explicitly that participating in activities designed to circumvent the product intervention measures is prohibited.
The July statement fits a broader pattern. ESMA has previously issued a targeted reminder on CFD product intervention measures when perpetual futures began attracting retail interest, applying the same logic: when a new product wrapper appears in the market, ESMA has shown it will issue a public statement rather than wait for enforcement to catch up.
For UK retail investors, the direct impact is limited: ESMA’s rules apply across EU member states rather than in the UK, where the Financial Conduct Authority (FCA) runs its own regime. The FCA introduced a permanent ban on the sale of binary options to retail consumers in the UK in April 2019. Whether the FCA follows with similar guidance on event contracts branded as prediction markets is the question worth watching.
