ESMA warns prediction market contracts could be regulated

On July 3 the European Securities and Markets Authority (ESMA) warned that some event contracts sold on prediction market platforms could meet the legal definition of binary options and therefore qualify as financial instruments under MiFID II, exposing those contracts to EU and national regulatory oversight.

ESMA stated that contracts on platforms such as Polymarket and Kalshi may fall under MiFID II when the event question refers to an underlying listed in Section C(4) to (10) of Annex I to MiFID II. When a contract qualifies as a financial instrument it should be treated as a derivative and fall within the scope of temporary product intervention measures on binary options.

The regulator noted that the label given to a contract does not determine its regulatory status. Firms offering these products must assess each contract against the legal criteria and comply with applicable rules, including any distribution authorisations required under national law.

Where contracts are classified as derivatives, they become subject to market protections enforced by National Competent Authorities in each EU member state. ESMA added that features such as a coupon or reward representing interest on funds paid do not change the binary nature of the contract.

MiFID II covers a broad set of instruments including options, futures, swaps and other derivatives linked to listed underlyings. Binary options deliver a fixed payoff depending on whether a specified event occurs; regulators have applied temporary restrictions and protections to such products because of the investor risk they can pose.

ESMA urged market operators to carry out detailed legal and factual assessments of each contract offered on their platforms and to engage with their national regulators where necessary. The statement focuses on the legal test for financial instruments rather than any particular platform.

Cris Carrascosa, chief executive of ATH21, noted: “The real challenge for firms lies in the upfront analysis – case by case, looking at the actual characteristics of the product rather than its label.” She added the guidance clarifies where existing rules apply to newer product types.