ESMA warns some prediction market contracts fall under EU binary options rules

The European Securities and Markets Authority (ESMA) has clarified that certain prediction market contracts fall under existing European Union financial regulations governing binary options, marking the regulator’s first public intervention on the fast-growing sector.

In a statement, ESMA clarified that event contracts with binary, yes-or-no outcomes and fixed payouts may qualify as financial instruments depending on the underlying event and should therefore be treated as derivatives under the Markets in Financial Instruments Directive II (MiFID II).

The clarification comes amid growing popularity of prediction markets and increased retail participation, as well as heightened scrutiny from European regulators. 

Several gambling regulators have blocked access to prediction market platforms such as Kalshi and Polymarket, while a coalition of nine regulators launched a joint initiative against unlicensed platforms in June.

Where event contracts qualify as financial instruments, they are subject to national product intervention measures that prohibit their marketing, distribution or sale to retail clients across the European Union.

“The marketing, distribution or sale to retail clients of event contracts that meet the definition of financial instruments is prohibited,” ESMA said.

The regulator also reminded firms that they are responsible for determining whether newly offered products fall within the scope of existing binary options restrictions and that distributing event contracts that qualify as financial instruments requires investment firm authorisation, even when they are offered only to professional or institutional investors.

ESMA clarified that contracts linked to equities, indices, interest rates, currencies or commodities may qualify as financial instruments under Annex I of MiFID II and must be treated as derivatives.

The regulator noted that event contracts that do not qualify as financial instruments could instead fall under the European Union’s Markets in Crypto-Assets (MiCA) framework or national gambling legislation, depending on their structure.

ESMA’s intervention builds on restrictions introduced in 2018, when it imposed a temporary ban on binary options for retail clients following concerns over consumer protection, misleading marketing practices and significant investor losses. While the temporary measure has expired, national regulators across the bloc continue to enforce permanent bans based on the same approach.

“While this public statement specifically mentions financial instruments marketed as event contracts, the assessment of whether the national product intervention measures apply should be conducted for all financial instruments with similar characteristics to event contracts,” ESMA said.

The clarification comes as Gibraltar has adopted a different regulatory approach by licensing certain prediction market operators under its intermediary betting framework.

ADI Predictstreet, FIFA’s prediction markets partner for the current World Cup, recently announced plans to expand its European offering beyond sports contracts after obtaining a Gibraltar licence in April. U.S.-based WagerWire has also received approval in principle to establish a prediction market platform in the jurisdiction.