The European Securities & Markets Authority has confirmed the ban on binary options will come into effect on Monday 2 July.
A month after that - on Wednesday 1 August - restrictions on marketing, selling and distributing contracts for difference (CFDs) to retail investors will come into effect across the European Union.
It follows widespread concern among regulators, including the Financial Conduct Authority, that retail investors risked losing money by investing in these instruments.
Steven Maijoor, chairman of Esma, said: "The measures Esma has taken today are a significant step towards greater investor protection in the EU.
"The new measures on CFDs will, for the first time, ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide understandable risk warnings for investors.
"Esma’s prohibition on the marketing, distribution or sale of binary options to retail investors addresses the significant investor protection concerns caused by the characteristics of this product.
"This pan-EU approach is the most appropriate way to address this major investor protection issue. [National regulators] will monitor the impact of these measures during their application and will assess, with Esma, what next steps are required."
Binary options allow an investor to make a bet on the price of value of a stock, commodity, currency, index or anything capable of being measured in financial terms.
CFDs are a contract between an investor and an investment bank or spread-betting firm where, at the end of the contract, the parties exchange the difference between the opening and closing prices of a specified financial instrument, including shares or commodities.
Analysis across the European Union found that between 74 and 89 per cent of retail accounts trading in CFDs typically lose money, with average losses per client ranging between €1,600 (£1,409) to €29,000 (£25,535).
Meanwhile Esma found investors in binary options made "consistent losses".
Esma's action on binary options represents a total ban on their sale, distribution and marketing but the regulator's action on CFDs includes a range of different restrictions rather than an outright ban.
As part of these restrictions, CFD providers will be banned from using incentives, a standardised risk warning will have to be issued which includes the percentage of losses on a provider's accounts, investors will have to be provided with guaranteed limits on their losses and the percentage of margin at which providers have to close out one or more retail clients' open CFDs will be standardised.
There will also be leverage limits on the opening position by a retail client depending on the volatility of the underlying asset, so the limit will be 30:1 for major currency pairs but 2:1 for cryptocurrencies.
The rules will take effect for three months and Esma has said before the end of this period it will review the measures and consider the need to extend them.
The FCA had been investigating CFDs after it noticed an increase in the number of firms offering them, including spread bets and rolling spot foreign exchange products, which raised concerns retail investors were trading products they did not understand.
In June it decided to hold back from making final rules while Esma considered its own interventions.
The FCA has warned binary options were "high-risk" and "speculative" and the majority of those who invested in them lost money.
It has also pointed out that in most cases, the firm a consumer buys options from benefits when they lose.
From January the FCA took over the regulation of binary options from the Gambling Commission as part of the introduction of Mifid II.
damian.fantato@ft.com
