Predictable: ESMA Clarifies Application of Binary Options Rules to Event Contracts and Prediction Markets

Background

Event contracts, and the prediction markets on which they trade, have seen a sharp rise in popularity in recent years, attracting growing retail participation in certain jurisdictions. For example, the global monthly gross volume of all event contracts has been estimated at more than $21.4 billion, much of which has been concentrated on US platforms.

Despite their increasing popularity, event contracts have faced regulatory headwinds in Europe, a position recently reinforced by the European Securities and Markets Authority (ESMA). 

ESMA Statement

On July 3, 2026, ESMA published a public statement on the application of national product intervention measures on binary options to event contracts (ESMA Statement).  The reference to “national product intervention measures” concerns a 2018 ESMA decision to temporarily restrict the marketing, distribution and sale of “binary options” to retail investors in the European Union (EU).  This temporary restriction was subsequently replaced by equivalent, permanent national restrictions imposed by the national competent authorities (NCAs) of the various EU member states. 

These measures defined “binary option” for purposes of the EU retail ban as a derivative, whether traded on exchange or over-the-counter, that: 

• must be settled in cash, or may be settled in cash at the options of one of the parties other than by reason of default or other termination event;
• only provides for payment at close-out or expiry; and
• limits payment to a predetermined fixed amount, or zero, if the underlying meets one or more predetermined conditions and a predetermined fixed amount, or zero, if the underlying does not meet one or more predetermined conditions. 

The ESMA Statement makes clear ESMA’s view that an event contract is likely to be a binary option subject to the EU retail ban where it qualifies as a “financial instrument” for MiFID purposes. 

The precise contours of this assessment requires a careful review of Sections C(4) through C(10) of Annex I to MiFID II, but is likely to be the case where an event question relates to any of the following:

• securities;
• currencies;
• interest rates or yields;
• emission allowances;
• other derivatives instruments;
• financial indices or financial measures;
• commodities;
• climatic variables;
• freight or inflation rates; or
• other official economic statistics.

The definition also contains a broad catch-all to include all “assets, rights, obligations, indices and measures not otherwise mentioned” which “have the characteristics of other derivative financial instruments”.

The ESMA Statement also makes clear ESMA’s view that an event contract that is in-scope of MiFID will be treated as a binary option for purposes of the EU retail ban notwithstanding that an investor may receive a coupon payment representing interest on the funds paid at the inception of the contract. For ESMA, the essential test is whether the contract has a “binary nature”, i.e. a binary outcome and a binary pay-out. Consequently, the marketing, distribution and sale of the foregoing event contracts to EU retail investors is completely prohibited. The ESMA Statement also reminds market participants that only investment firms authorised under MiFID may make such products available to non-retail investors in the EU.

ESMA goes on to clarify that event contracts that are not financial instruments – which would be the case, for example, where the event question relates to sporting or political outcomes – may constitute bets subject to regulation under domestic gambling laws or, depending on the particular facts and circumstances, a cryptoasset subject to the EU’s Markets in Cryptoassets Regulation. 

Comparative Perspective – UK 

The ESMA Statement accords generally with the stated approach of UK regulators to event contracts to date. 

Most recently, in March 2026, the Financial Conduct Authority (FCA)’s perimeter report included a statement that event contracts – which they refer to as “prediction market products” – linked to non-financial events “such as sporting or political outcomes” are subject to the UK’s gambling legislation but where they reference “financial or certain climatic events” they fall within the UK’s financial services regulatory perimeter. The FCA reiterated that event contracts falling within its remit “remain subject to the FCA’s permanent ban on the sale of binary options to retail consumers”.  

Comparative Perspective – United States 

In the United States, prediction markets have grown rapidly under a comprehensive federal framework.  The Commodity Futures Trading Commission (CFTC) exercises exclusive jurisdiction over event contracts as swaps or futures under the Commodity Exchange Act, and total trading volume on CFTC-registered markets exceeded $25 billion in 2025. Unlike the EU and UK retail prohibitions, the CFTC may restrict contracts involving enumerated activities – such as gaming, terrorism, or war – only upon an affirmative “contrary to the public interest” determination.

In June 2026, the CFTC proposed rules clarifying these public interest factors, emphasizing informational value and hedging utility rather than categorical bans. The proposed framework contemplates that contracts based on political elections, economic indicators, and aggregate sports outcomes are generally permissible, subject to appropriate settlement criteria and market integrity safeguards. While certain states have raised jurisdictional challenges, the CFTC has consistently asserted federal preemption.

Next Steps

In light of the ESMA Statement, EU investors interested in event contracts, and those intermediaries and platforms wanting to offer and sell such contracts to EU investors, should proceed carefully. In fact, ESMA recommends that market participants “conduct a careful legal analysis of these products and their functioning” before determining the extent to which they may be made available to investors in the EU. 

In addition, while the ESMA Statement does not announce any new rulemakings, it signals heightened supervisory attention from ESMA and NCAs. Accordingly, market participants active in this space should monitor ESMA communications and NCA guidance closely in the coming months.

The ESMA Statement can be found here.