Understanding Binary Option Regulations
The regulation of binary options is an issue which is of immense importance to traders of the day. The market is trying to move into a phase of ensuring that confidence exists in the market. For the first three years of the retail trading of binary options, brokerages were basically an all comers affair.
There was confusion as to what constituted binary options trading, whether it was a financial trading activity or merely a gambling operation, what constituted the entry-level requirements for brokers, and a host of other issues.
During this lacuna, many fly-by-night operators came into the market and wreaked havoc on hapless traders. Facing an extreme lack of market confidence, the countries which hosted many of these brokers decided to take positive steps in ensuring the regulation of binary options in their jurisdictions.
The essence of this article is to help new traders understand the regulatory status of binary options so that in making a choice of where to domicile their accounts, they would be able to act with a reasonable degree of market information.
Where Do We Find Today’s Binary Options Brokers?
Most of the binary options brokers operating in the world today can be found in the following countries:
- United States
In addition to general rules and regulations which are usually the norm for any regulatory environment, we expect to have some specific requirements set out by each regulatory agency.
Cyprus harbours the largest number of binary options brokers in the world. This is because many companies take advantage of the investor-friendly and low-tax environment that this country provides. Hitherto, binary options were unregulated. However, the activities of scam brokers not only began to threaten the binary options space, but also began to affect the investor confidence in the country as a whole. To safeguard the status of the country as a place where investors come in with peace of mind, the Cyprus Securities and Exchange Commission (CySEC) which had long been the regulator of the stock and the forex market in Cyprus, stepped in to outline a full regulatory protocol for binary options in Cyprus.
A list of regulated binary options brokers, as well as those who were previously licensed but are now suspended for various infractions, is available on the CySEC website. All brokers are expected to list their license numbers on their website.
Binary options trading is now a fully regulated event in Japan. The Financial Futures Association of Japan (FFAJ) has made a number of changes to the way binary options is traded in Japan. The changes are:
- Trades must have a minimum expiry of two hours, effectively stopping platforms from promoting short term binaries.
- Prohibition of the promotion of binary options as an “easy investment”.
- Enforcement of “Know Your Customer” guidelines in account opening forms.
- Setting of common strike prices for each contract, thus banning the use of market price to set the strike price.
- Fixed payouts which are set to last throughout the lifetime of the option.
- Prohibition of delays or suspension on trading without reasonable cause.
- Prohibition on the use of bonuses as client recruitment tools.
Oversight of the binary options market has been transferred from the Maltese Lottery and Gaming Commission (MLGA) to the Maltese Financial Services Authority (MFSA), effectively ending the days when binary option trading was considered a gambling activity. Minimum capital requirements of 730,000 Euros have also been imposed on brokerages to ensure that they are able to satisfy the withdrawal requests of clients without delays.
The The Autorité des Marchés Financiers (AMF) or French Financial Markets Authority has banned offshore binary options trading in France. A similar prohibition is also in place in Italy.
The Australian Securities and Investment Commission is in charge of regulation of the financial markets in Australia. Concerning binary options, there is now a shift to promote active regulation of all binary options brokers with a physical presence in Australia. New regulations are in the works which will prohibit the issuance of bonuses to traders by these brokers.
In the US, regulation of binary options is done by the Commodities and Futures Trading Commission (CFTC). All binary options offering is expected to be exchange-traded. This means that only the North American Derivatives Exchange (NADEX), Cantor Exchange and the CBOE are cleared to offer binary options in America. Offshore binary option trading on online platforms is banned in the US and can even attract jail time.
Binary options in the UK are regulated by the Financial Conduct Authority. All binary options brokers are expected to segregate traders’ funds from their operational accounts, and this rule is enforced to the letter. Regulated brokers in the UK include Banc de Binary, IG Index, AnyOption and Opteck.
In Russia, binary options will become a regulated financial instrument in 2015. In addition, a personal income tax on profits from online trading is to be introduced, making proceeds of binary options trading directly taxable. Regulators will therefore start to require reporting on the earnings of the traders on the binary options platforms to ensure compliance with this rule.
The countries mentioned above are the areas where most binary options brokers are located. Therefore, if you want to start regulated binary options trading, it is important to know what the rules are so you know ahead of time what you are getting into.