Binary Options in Canada: How the 30-Day Ban Works

Office towers of the Toronto financial district lit up at night — Photo: Ken Lund from Reno, Nevada, USA, CC BY-SA 2.0, via Wikimedia Commons

Binary options sit on an awkward boundary. The British Columbia Securities Commission describes one as "a contract that is like a bet". It pays out on the answer to a yes-or-no question about a price, a rate or an event, often within hours or minutes. Yet in Canada these products are not run or licensed by provincial gaming regulators. They fall to the securities regulators, who have taken a hard line: the short-term version may not be sold to individuals at all.

This article explains the rule that does that, Multilateral Instrument 91-102 Prohibition of Binary Options, how British Columbia handles the same products, and why the regulators treat binary options as securities and derivatives rather than as gaming. It is general information, not investment or legal advice.

What a binary option is

The Canadian Securities Administrators (CSA) describe binary options as based on the outcome of a yes/no proposition. If the answer is yes, the buyer is "in-the-money" and receives a predetermined fixed amount. If the answer is no, the buyer is "out-of-the-money" and loses all, or nearly all, of what they paid. The proposition is tied to an underlying interest, such as a currency, commodity, stock index or listed security, or to an event connected with one, such as an election or a change in a benchmark interest rate.

The companion policy to the instrument gives examples of the kind of proposition involved: whether the Canadian dollar will be above a stated US-dollar level on a particular day, whether gold will be below a stated price at a stated minute, or whether more than an inch of rain will be reported at a particular place on a specific day. The buyer usually gets no right to the underlying asset; settlement is in cash.

The many names

The CSA lists other names under which these products are sold, and makes clear that the label does not matter. They include:

all-or-nothing options;
asset-or-nothing options;
bet options;
cash-or-nothing options;
digital options;
fixed-return options;
one-touch options.

What MI 91-102 says

The instrument is short. Section 1 defines a binary option as a contract or instrument that provides for only (a) a predetermined fixed amount if the underlying interest meets one or more predetermined conditions, and (b) zero or another predetermined fixed amount if it does not. Then come the prohibitions:

Section	Rule
s.2	No person or company may advertise, offer, sell or otherwise trade a binary option with or to an individual
s.3	The same prohibition applies to a person or company created, or used, solely to trade a binary option
s.4	Sections 2 and 3 do not apply to a binary option having a term to maturity of 30 days or longer
s.5	Regulators may grant exemptions, except in Quebec; in Ontario only the regulator may do so
s.6	In force on December 12, 2017 (in Saskatchewan, on filing if later)

Section 3 is there to stop an easy workaround. Without it, a platform could ask a client to set up a company and trade through it. The companion policy says section 3 is designed to support the prohibition in section 2 by closing that route.

How the 30-day threshold is measured

The companion policy reads "term to maturity" as the time from when the option is entered into until the time, or the end of the period, set for deciding whether the condition is met. It adds a point that matters in practice: a contract with a nominal maturity of 30 days or more is still caught if the condition is tested within less than 30 days. A product cannot escape the ban simply by carrying a long expiry date on paper.

Not every all-or-nothing contract

The companion policy states that the definition is aimed at defined, discrete payouts, and that a contract with a continuous payout tied to the underlying interest would not meet it. It also lists contracts the CSA does not consider binary options for the purposes of the instrument, including a mortgage rate guarantee, a regulated insurance or annuity contract, and "a lottery ticket from a governmental lottery or gaming commission, regulated sports betting and bingo at a licensed bingo hall".

Where the ban applies, and British Columbia

The CSA notice states that the instrument was implemented by the securities regulators in all Canadian jurisdictions other than British Columbia. The Alberta Securities Commission lists both the instrument and its companion policy as effective on December 12, 2017.

British Columbia took a different route. The BC Securities Commission did not adopt the instrument and instead issued BC Notice 2017/02 Binary Options. The notice warns investors that "no person can legally sell binary options to retail investors" in the province, and that binary options cannot legally be advertised, offered, sold or otherwise traded to retail investors in BC, whether in person, by telephone or through a website. It notes that no one has been registered to sell binary options in BC and no securities disclosure document for them has been filed. It also points out that fraudulent schemes are caught by the prohibition on securities fraud in section 57 of the BC Securities Act.

Put side by side, the two approaches differ in form more than in result for the average person:

Outside BC: a specific rule bans binary options with a term under 30 days for individuals, whatever the investor's sophistication.
In BC: no separate product rule, but the regulator's position is that selling binary options to retail investors is illegal under the existing requirements.

Why the regulators acted

The CSA notice says the purpose of the rule is to protect would-be investors from binary options fraud and from illegal promotion of extremely high-risk products. It describes a large number of complaints about online platforms that operate as unregistered dealers, are typically located offshore and promise quick, high returns.

The notice is blunt about how those platforms behave. On some, trading does take place, but it is extremely difficult and often impossible to win, because the platform controls the odds and often the reference value of the underlying interest. On others, winnings appear as a credit on the account but are never paid out. In many cases no trading happens at all. The BC notice adds that fraudsters often show early profits to encourage larger payments, and that recovering money lost to offshore operators is very difficult or impossible.

The CSA also stated that no offering of binary options, including by a broker, dealer or platform, has been authorized anywhere in Canada. Products outside the instrument, such as longer-dated binary options, are still securities or derivatives and remain subject to registration, anti-fraud, market conduct and disclosure rules.

Gambling-like product, securities rule

If a binary option is "like a bet", why is it not regulated as gaming? The question was put to the CSA directly. In the comment process, one commenter argued that fraudulent binary options should be treated as gambling, regulated by the gambling authority in each province and subject to the Criminal Code, with enforcement by the RCMP. The CSA made no change, stating its view that binary options are securities and/or derivatives in each participating jurisdiction, so regulating their advertising, offering and trading is within its jurisdiction and mandate.

That has practical consequences for anyone used to the gaming world:

A provincial gaming licence or registration does not make a binary options product lawful. The relevant question is whether the seller is registered under securities law, which can be checked at aretheyregistered.ca, as both the CSA and BCSC recommend.
The reverse is also true. The companion policy expressly places government lottery tickets, regulated sports betting and licensed bingo outside the binary option definition.
Complaints about a binary options platform go to the local securities regulator, not the gaming regulator. Both notices also point investors to binaryoptionsfraud.ca.

For how provincial gaming licensing works, see our pages on gambling licences and on gambling regulation in Canada.

Event contracts and prediction markets

The same instrument has resurfaced in discussion of prediction markets, platforms where event contracts pay out based on the outcome of future events. In a joint release, the CSA and the Canadian Investment Regulatory Organization (CIRO) reminded industry and investors that anyone trading or facilitating trading in event contracts that are securities or derivatives must meet the applicable requirements, and cited MI 91-102's prohibition on short-term binary options for individuals. The release stated that no prediction market had been recognized as an exchange, registered as a dealer or exempted by the CSA at the time, and that non-compliance may lead to enforcement action.

Red flags worth knowing

Drawing on the warnings in the CSA and BCSC notices, the signs of a problem platform include:

an offer of binary options, or any of the alternative names above, to an individual, particularly with expiries measured in minutes or hours;
promises of quick, high returns;
an offshore operator with no Canadian registration;
pressure to deposit larger amounts after early "wins", including through credit card cash advances;
a balance that shows winnings but cannot be withdrawn.

Many of the same patterns appear in fraudulent gambling sites. Our guide to casino scams covers them, and the psychology of gambling page explains why short, all-or-nothing outcomes can be so compelling. If any form of betting, including products dressed up as trading, is causing harm, our responsible gaming page lists provincial support services.

Questions readers ask

Are binary options legal in Canada?

Outside British Columbia, MI 91-102 prohibits advertising, offering, selling or otherwise trading a binary option with a term to maturity of less than 30 days with or to an individual. In BC, the regulator's position is that no person can legally sell binary options to retail investors.

When did the ban take effect?

The instrument states that it came into force on December 12, 2017, with a later date in Saskatchewan if the regulations were filed afterwards.

Why doesn't the ban apply in British Columbia?

The BC Securities Commission did not adopt MI 91-102. It issued BC Notice 2017/02 instead, which says binary options cannot legally be advertised, offered, sold or otherwise traded to retail investors in BC.

Are binary options regulated as gambling?

No. In response to a comment urging gambling regulation, the CSA stated that binary options are securities and/or derivatives, so their sale falls under securities regulators.

Does the ban cover lottery tickets or sports betting?

No. The companion policy lists a lottery ticket from a governmental lottery or gaming commission, regulated sports betting and bingo at a licensed hall among products not considered binary options.

Binary options in Canada: how Multilateral Instrument 91-102 bans them