Skip to content
Home » Binary Options Regulation: Overview of Regulatory Environment

Binary Options Regulation: Overview of Regulatory Environment

While binary trading has become extremely popular during the last decade, many traders are still hesitant to make investments in this market as a result of fears relating to binary options regulation and the security encompassing options trading. This elevated feeling of concern is to some extent due to the level of trust that traders have with regards to the financial markets.

Indeed, there have been a number of binary option scams that have tripped up a large number of traders and left them with a sour feeling in their mouth. Even if a broker is well known and appears to have a strong online reputation, traders are naturally concerned about the legal protections afforded to them in a worst case scenario event.

At the trading club, our members regularly keep up to date with the most important regulatory changes in the industry from broker rules to trader rights.

Binary Option Regulation

EU Regulation

At present, one of the preferred locations for binary options brokers to become regulated for EU coverage is in the Republic of Cyprus. Due to the fact that Cyprus is among the lesser developed financial systems in Europe, many people have a tendency to think of Cyprus as a location which has with little or no financial regulation system in place. To these individuals, this is the primary reason as to why a binary options broker would base their operation in Cyprus, in an effort to steer clear of regulation. In truth, one of the main reasons as to why many brokers choose Cyprus is lower tax rates. In Cyprus, the tax rate on corporate profits is 10%. Compare this to the United Kingdom rate of 24% and the reasoning for selecting Cyprus becomes even more clear.

For even more insight, consider the United States, where tax rates are even higher than they are in the United Kingdom. US-based companies can be taxed at rates up to 35%. When you take into consideration the simple fact that the vast majority of the binary options market is found in Europe, it seems to make sense that brokers would choose to be based in Cyprus. Furthermore, many traders notice that most binary options brokers are not willing to accept traders who reside in the United States. In doing this, they are able to avoid being taxed by US tax regulators.

What is Cysec?

CySEC (Cyprus Securities and Exchange Commission) was set up under the Securities and Exchange Commission Law. The objective of this supervisory authority is to make certain that binary options regulations are in place in order to safeguard investors as they participate in securities and binary options trading. The mission of the CySEC is to issue licenses to qualifying investment firms, brokers and other agencies within the investment market. CySEC is also in charge of removing a firm’s operating license in the event of misconduct.

CySEC additionally oversees the operations and financial dealings of the Cyprus Stock Exchange, along with those of other participants in the investment market. The commission works to make sure that the all agencies that fall under its supervision are following the laws. When necessary, CySEC will investigate trader reports to make certain that binary options traders are protected and will also investigate on the part of regulatory agencies in other countries. Brokers that are found not to be in compliance with the required laws are subjected to disciplinary measures and can lose their license.

Cysec Rules

Rules of Cysec

Under CySEC rules, any binary option broker is required to hold all investors funds inside of a trust account. What this means is that the funds that a trader deposits with a regulated binary options broker are held independently from the brokers’ business funds.

As a result, traders can be confident that their funds are protected from scams, theft or the negative effects of bankruptcy. CySEC binary options regulations do require licensed brokers to secure a third-party who will work to keep them accountable. This helps to make certain that brokers are holding to the required laws and regulations.

In accordance with CySEC requirements, licensed binary options brokers are obligated to exercise the maximum level of openness by allowing public and regulative authorities to look into their operations. This is extremely important because it helps to protect traders from dishonest brokers and it requires brokers to implement best business practices. Last but not least, binary options brokers that are regulated by CySEC are instructed to offer legitimate assets and to hold to industry requirements for the trading of binary options. In contrast, it is not uncommon for unregulated brokers to offer illegitimate assets for trading.

While some might claim that financial regulation standards in countries such as the United Kingdom and Germany are better than those of Cyprus, this is often due to the fact that many people have no clear comprehension of how the Eurozone marketplace functions. As part of the regulatory framework of the financial trading markets within the Eurozone, the EU parliament has put forth the Markets in Financial Instruments Directive, or MiFID. The MiFID was designed to enhance consumer security and to help combine the different financial markets into one single market. It is important to note that Cyprus is in complete compliance of MiFID guidelines.

MiFID went into effect in November of 2007 and since that time has been the foundation of the European Commission’s Financial Services Action Plan. Commission actions drastically changed the way in which EU financial services market segments operated. The MiFID set forth measures that transformed and improved upon the organization and operations of investment firms, assisting with cross-border binary options trading while creating tactical opportunities. CySEC closely monitors binary option brokers to ensure that they remain in compliance with MiFID.

Why is a Cysec Regulated Broker Safe?

In regards to legal protections against scam investment companies, Cyprus actually maintains higher standards in fiduciary responsibilities than the United Kingdom, which does not yet operate in complete compliance of the MiFID. The OTC markets have always primarily been self-regulated, which is why there is very minimal binary options regulation in existence. Only recently has the regulatory platform to manage binary options been drafted out. Cyprus was among the first Eurozone members to have adopted legal classification for binary options. With this legal definition, regulatory authorities such as CySEC have become empowered to take action under the financial regulatory structure.

Traders might be astonished to discover that binary options are actually not classified as “financial options” under the United Kingdom Financial Services Act. As an alternative, traders are likely find UK-based binary options brokers being regulated by the UK Gaming Commission which classifies binary options trades as “bets”. In the United Kingdom, betting debts cannot be enforced within the courts, as they are referred to as “debts of honour”. Visualize a scenario where a trader attempts to file suit against a UK-based binary options broker for this type of debt.

Some binary options brokers, after receiving their license to be regulated by CySEC in Cyprus, will go on to register in other countries such as the United Kingdom or Germany. Some regulated brokers have taken their CySEC license and registered with BaFIN in France, or the FCA in this United Kingdom. For example, IQ Option has a CySec licence as well as a Consob one from the Italian regulators. These actions only service to create an added position of registration. A brokerage is not required to register with multiple EU regulators in order to conduct business throughout the EU. Even so, it is always important for traders to verify that their chosen binary option brokers do hold a license and that the license remains valid.