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CFTC Goes After Binary Options - How Will the Industry React?

Jun 11 2013

Just a few days ago, we reported on the outcome of an investigation conducted by the US Commodity Futures Trading Commission (CFTC) on the activity of binary options broker Banc de Binary in the US. The broker was charged with several breaches of CFTC regulations, including offering off-exchange binary options trading to US customers. Though it is yet unclear what the repercussions for Banc de Binary will ultimately be, there is no doubt in our minds that the CFTC's firm stance will affect this whole branch of the trading industry.


So what are binary options brokers to do, then? At the moment, regulations in the US are very restrictive. Binary options may only be traded in designated exchanges, and then only by customers whose annual net worth exceeds $5 million. There is, in fact, only one entity in the entire country that matches up to those requirements – the North American Derivatives Exchange (NADEX). In addition to these requirements, any company wishing to offer binary options trading to customers of more modest means must register as a Futures Commission Merchant (FCM) and comply with a whole additional set of rules, including a hefty net capital requirement of $20 million. 


There is a possibility that brokers wishing to offer their services to US citizens could work out a partnership with NADEX, and some are likely to do so, but there is a small chance of profit there. As Eyal Rosenblum, Co-CEO of binary options software provider TechFinancials said before the Forex Magnates: “Currently there is no attractive solution to offer brokers, therefore the only way is to develop further technology as a separate entity because currently there is no benefit to binary options brokers in going to NADEX... Even if a broker goes to the expense and effort of gaining a license to operate in America, that broker will still have to go through the NADEX exchange, so therefore they go through all that expense and hard work and the customers end up being NADEX customers”.  TechFinancials is working on another solution to the problem, an exchange-compliant trading platform, but that will also cost brokers a lot of time and effort, not to mention money. 


The least likely solution is for the CFTC to loosen its restrictions. The Commission has already expressed concerns about the risks of binary options trading, including issues like fraud, identity theft, false advertising, etc. While these are all valid points, it must be noted that other countries have also taken measures to regulate this type of trading without being quite so restrictive. Even Japan, a country generally known for its rigid attitude toward law (and just about everything else) allows more flexibility. Binary options regulations in the Land of the Rising Sun as proposed by the Financial Futures Association of Japan (FFAJ) earlier this year deal mainly with preventing brokers from offering their clients false or misleading information. Companies must provide adequate information about the nature of binary options, the risks and costs. They must also and collect necessary data from their clients regarding trading experience, amount of assets, and a trading limit to prevent excessive trading. The only rule set by the FFAJ that may give brokers actual cause to complain deals with the expiry period of binary options, which should be no less than two hours. 


In Malta, binary options have been regulated by the Malta Financial Services Authority (MFSA) since the beginning of the year, making them an official financial instrument, rather than a gambling one. As a result, brokers are required to have a physical office in Malta, as well as an MFSA license. The minimum net capital requirement is EUR 730,000, or about $950,000 – quite a contrast to the CFTC's $20 million!


Unfortunately, throughout the rest of Europe the situation is a bit murkier. CySEC was the first regulator to officially lay rules about trading binary options. Companies that wish to offer this financial instrument must first register as a Cyprus Investment Firm (CIF), and comply with all requirements pertaining to that. Some countries, like Italy and Turkey, have chosen to simply ban binary options trading, while most others have left matters unregulated.


Obviously, there are other regulatory options to handle this side of the industry, aside from the totally restrictive approach adopted by the CFTC. On the other hand, a restricted market is still better for customers than an unregulated one, and brokers will just have respect that, no matter how rough the road or high the price is. 


TAGS: cftc  binary options  regulation 
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