Binary Options Regulations
What is Binary?
The world “binary” means “something that has two parts”. And this is exactly how binary options trading is different from any other trading methods: it has only two possible outcomes – either a complete loss or a complete win. There is nothing in between. Underlying assets may include any currency, stocks, commodities such as gold, indices, etc. In the business world, the binary options trading is a simple way to put your knowledge of the market and its fluctuations to use and take advantage of it by buying put or call.
Need for Regulations
Binary options trading has become increasingly popular around the world and is currently is one of the biggest online trading activities. Traders enjoy this simple way of making money by simply predicting the movements of underlying asset prices. Unfortunately, fraudulent brokers are trying to catch up with the industry growth at the equal pace and rob those less experienced trades of their hard-earned money. To combat this disturbing tendency, many governments decided to implement various regulations to assure all traders have equal opportunity to trade safely and not worry about scams and unreliable brokers.
By now, most countries have their own regulatory bodies that control and issue licenses to binary options brokers operating in that particular countries. Some countries such as the European Union member states accept regulations by other countries. For instance, the most influential and powerful regulatory body in the EU is CySEC (The Cyprus Securities and Exchange Commission), which is located in Cyprus.
Some fraudulent brokers might falsely claim that they have a license issued in some particular country. But the truth is that it’s always the responsibility of a trader to double check and make sure that the broker they have decided to trade with has a valid license and therefore has passed all the necessary procedures and proved to be trustworthy.
Binary options trading industry can be tempting to less experienced traders that hope to earn a lot of money very fast without putting much effort. The reason for this might be the deceptive simplicity of binary options trading. With the choice being a plain “yes” or “no” it is easy to assume that there is nothing much to know. But nevertheless, it is proven that educating oneself about the possibilities on the market as well as various threats when trading is crucial to succeeding in binary options.
Therefore, there has been an increasing need to control the industry and help traders figure out which broker or trading software they can trust. It is necessary to protect investors’ funds from a plain robbery which some fraudulent brokers simply are. So how do those regulatory systems looks like in different countries and what do they exactly do? Let’s try to answer these questions together.
Regulation in the US
In the USA, the federal securities laws do not allow any company to offer or even sell securities unless they are registered with SEC (Securities and Exchange Commission) or there is an exception under which they don’t have to follow with this registration. The binary options contract terms are just the same: unless a registration with SEC is done or an exception is created, the sale of any options is considered illegal.
Nevertheless, some binary options related companies still operate as unregistered brokers or dealers. Any person has to register with SEC in case they provide any services associated with financial transactions or even being a third party to any sort of financial operation.
Another company called NADEX (North American Derivative Exchange) acts as an intermediary between a broker and a trader. They take tax both from investors and traders during all transactions. It is regulated by the CFT. The company functions more or less as a broker and if we consider it to be one than NADEX is at the moment the only regulated broker operating in the US.
CFTC Binary Options Regulation
CFTC (Commodity Futures Trading Commission) regulates the US companies under the act of Commodity Exchange. Any company or an individual that provide trade-related services or give advice on trading in the USA have to be registered with National Futures Association (NFA). CFTC, however, assures transparency and open market for everyone in the industry.
Regulation in Europe
In Europe, the situation is quite different. The institution called CySEC (or The Cyprus Securities and Exchange Commission) that we had mentioned earlier is definitely the most influential binary options regulatory body in the region.
Since Cyprus does not have the strongest economies in the region, it is often thought that there is not much of financial regulatory regime in place and it is easy to invest there. However, the reason for investments in Cyprus being popular is the low taxes there. So brokers registered there actually enjoy many benefits just as other financial companies. Those attractive benefits being bonuses and very professional treatment. But the regulations are tough here too: any broker registered with CySEC undergoes complicated procedures and frequent checks in order to be licensed. We often hear of warnings being issued to those brokers that hadn’t met the requirements. At the same time, in our Broker section, we list many brokers that are CySEC licensed and therefore highly reliable to trade with.
Regulation in Australia
A big number of binary options traders comes from Australia as well as many recommended brokers. Australian Securities and Investment Commission is the regulatory body in this region. Any broker or binary options related company operated in the region has to be additionally registered with Australian Finance Services.
Australian traders are also allowed to trade with brokers that are registered in New Zealand. Australian traders are well-known for being highly educated about the industry, trading with high deposits and being very successful in their trading.
Regulation in the UK
The UK has always been known as number one when it comes to Forex trading. And since binary options trading is quite similar, it has also enjoyed a lot of attention here. Also, regulations here are very favorable to traders. UK-based binary options traders are free to work with UK-regulated brokers as well as the brokers that are regulated by any other regulatory body in the European Union.
Previously, binary options trading in the UK was handled by the gambling commission. But since 2015 it is regulated by FCA (Financial Conduct Authority, FCA). At the moment the entire country, however, is undergoing the transition period and we are eager to see what the outcomes will be like.
Regulation in France
In France, binary options are neither illegal nor regulated. Some binary options brokers were banned by The French Financial Markets Authority (AMF – Autorité des marchés financiers) in the past. But at the moment the industry remains a gray area that is yet to become more established here.
Regulation in New Zealand
The authorities of New Zealand have made a step towards binary options traders and not only made binary options trading legal but also did a great job in regulating and assessing the industry. The Financial Markets Authority (FMA) is the regulatory body responsible for assuring binary options is safe and secure in the region.
Regulation in Italy
Finally, the official Italian binary options regulator is called CONSOB. In this aspect, the Italian authorities are quite strict with their regulations and approval. In the past, companies trying to operate without an appropriate authorization in the region were issued fines that reached up to €500,000. Every broker in Italy has to undergo the necessary procedures and obtain a CONSOB license.
In the modern binary options industry that keeps growing day by day, the regulations are not only needed but necessary. But apart from any measures that individual countries or regions are undertaking to assure their traders are safe, the traders themselves have to educate themselves and stay informed about all the nuances when it comes to legal matter.
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References and Further Reading:
- Interpreting Objects and Collections (Susan Pearce)
- Gifts and commodities show extra info (Gregory, C.A.)
- Do option markets correctly price the probabilities of movement of the underlying asset? (Yacine Aı̈t-Sahalia, Yubo Wang, Francis Yared)
- The effect of derivatives trading on volatility of the underlying asset: evidence from the Greek stock market (Evangelos Drimbetas , Nikolaos Sariannidis & Nicos Porfiris)
- Option pricing with an illiquid underlying asset market (Hong Liu, Jiongmin Yong)