regulationsThe binary options market initially kicked off without a well-defined regulatory framework, and this gave rise to a number of cases of infractions from brokers. Traders complained of not getting paid, getting stiffed outright by brokers and not getting a good transparent deal generally. These events showed just how important it was to start regulating the relatively new market.

But just why is regulation important anyway? Regulation generally entails a lot of oversight by a government agency or an industry self-regulatory agency. These oversight functions look at the way the market is setup, the credentials of those who run brokerage companies, the extent to which trading platforms conform to global best practices and of course, the extent to which the market displays a transparent setup which does not skew the market in favour of some participants.

Specifically, regulation of the binary options market looks at the following:

How well capitalized is the brokerage company?

This is a measure of the financial strength of the company offering brokerage services and immediately speaks volumes of the ability of the company to fulfill withdrawal requests. Brokerages operate like banks. They operate on the premise that all customers will not make withdrawals at the same time, and that money remains in the system to enable them do business with the money and pay off customers that need withdrawals fulfilled. A customer who wants to draw profits will not wait for the brokerage to do business to make a profit, therefore there must be enough money kept aside to take care of this. This introduces the concept of segregation of accounts. So regulatory agencies will like to know if a broker is well capitalized and also maintains a segregated account where money belonging to traders are kept exclusively.

Company Background

Regulation also involves knowing who is behind a brokerage.  You certainly would not want to do business with a binary options broker being financed by drug dealers or people with a checkered past. Therefore, only people who have the requisite qualifications and are people of high integrity are allowed to open brokerage companies.

Reporting

Regulators also want periodic reporting so they know that the binary options brokerage is operating within set out rules through and through. You do not want to work with a brokerage that only obeys the rules from January to October and then skews the markets to make money from clients so as to cover revenues for the rest of the year.

Transparency

Regulators want to know that a trading platform works transparently and provides equal opportunity for everyone. It is always disheartening to hear of insiders switching algorithms so that they can benefit at the expense of outsiders. You only need to read the latest news about happenings in the fantasy sports industry to understand this point.

Misconduct

What happens when there are infractions? Regulators usually have a criminal enforcement division to investigate complaints and punish any offences.

These reasons stated above are why binary options brokers must be regulated. The brokers hold the trader’s capital in trust, provide the platform as well as market access and also fulfill all financial transactions relating to the trading account. Such an entity with sweeping powers over traders must therefore have some form of check and balance to ensure that they are not umpires in a market they are active in.

Country Regulation of Binary Options Brokers

This article will end with a brief mention of countries or regions where binary options is actively regulated. Regulation is stronger in some areas than in others. Whatever the case, some regulation is better than none at all.

US

Binary options in the US are fiercely regulated by the Commodities and Futures Trading Commission, with input from the Securities and Exchange Commission which regulates some of the assets traded as binary options in the US.

Cyprus

The Cyprus Securities and Exchange Commission is the 1st regulator outside of the US to actively try to stop the rot that was fast becoming binary options in the European unregulated environment. CySEC has however not been as hard on errant brokers as its counterparts in the US. Still, their coming on stream with regulation is a lot better than the situation was pre-2013.

Japan

The Japanese Financial Services Authority (JFSA) and the FFAJ are responsible for regulating Japanese binary options brokers. Major changes as to how binary options brokers can do business have been made. The JFSA website has a full list of the new order of doing things as far as binary options brokers are concerned.

Australia

In Australia, binary options brokers are regulated by the Australian Securities and Investment Commission (ASIC). ASIC is making moves to strengthen its regulatory framework and is closely working with other regulators in Asia to make this happen.

Malta

The Maltese Financial Services Authority (MFSA) regulates binary options brokers in Malta. Brokers in the binary options market must be able to start with a capital of 730,000 Euros. MFSA thus became one of the first regulators to place mandatory capital requirements on the country’s binary options brokers.

Russia, Canada and South Africa are working out regulatory frameworks for their brokers. France and Italy prohibit marketing of binary options products by offshore brokers. No records exist of any binary options brokers licensed by the regulators in both countries.

In other parts of the world, binary options remain an unregulated market and “brokerages” still operate with no inhibitions.

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