The word binary stands for “(something having) two parts”. Binary options are different from the conventional methods because the trades have two possible outcomes, either complete loss of an asset or gain with a fixed compensation. There is no partial recovery. These assets may include money in any currency, stocks, precious commodities like gold, indices, etc. In the field of trade and business, binary options are simple ways to trade underlying assets keeping in mind the fluctuations of the market value of these assets. The more the investor is experienced, the more he will be able to predict the fluctuations.
Binary options trades have increased in the last decades as the most favourite online trading ventures. Traders have been making money by simply predicting the directions of assets on various brokers’ platforms. However, incidences of fraudulent brokers stealing hard-earned money from traders have increased in equal measures. To solve this issue, many governments began to legalize and regulate binary options activities to ensure traders trade safely and securely with their money to earn profits.
Many countries have financial regulators that regulate brokers who provide binary options services to traders. Some countries such as the European Union members accept brokers who are registered by with one country’s regulatory agency. For instance, the arrangement that CySEC (the binary options brokers regulator in Cyprus) has with the EU countries. Fraudulent brokers may claim that they have a license from a regulatory agency of a specific country. However, it is your responsibility as the trader to double check that the regulator has actually registered the broker. You also need to ensure that the license of the broker is still valid.
Binary Options trading industry is quite enticing for traders as well as unskilled individuals who do not know much about trading but still tries to make money since the trades are fast and easy to understand. They are simply based on either a yes or a no. This simplicity has attracted newcomers to the financial markets. However, whenever the participation is too high, the risk involved are proportional too. The industry’s trades hosted on some platforms have sparked a huge negative response from the side of investors because of cases of deceit. The trading is basically done on internet platforms. Because most of these platforms operate outside of regulations, investors are at greater risk of fraud. These non-regulated ways of trading have motives to provide the investor with an overall average negative gain without any probability of net profit, which is outside the rules of regulatory bodies. The complaints fall into three categories, which are, denial to refund or credit customer accounts or reimburse funds to customers, identity theft and unethical usage of software to generate overall losing trades.
To check the scams and stealing, the requisite is to ensure that the investors’ money is going to a trusted account of a third-party which is safe to keep with until the result comes. This is a mandatory part of investment under governmental regulations by government financial regulators. There has always been the need to ensure fair trading practices in binary options so that the money of the clients is not at risk of getting in wrong hands. The already increasing count of the scams is an alarm for the governmental as well other regulatory bodies to check the reforms to regulate the binary trading and strengthen the laws against frauds.
Regulation in the US
Under the federal securities laws in the US, a company need not lawfully offer or sell securities unless the offer and sale are registered with the SEC or an exemption have been created from such security registrations. The terms of binary contracts are provided with a specified return to the investor by the price of the securities in the rule-book of the company’s security policy and may not be sold unless the registered, exemptions from registrations are given in specific cases only. In the absence of any registration or exemption, the offer or sale of the binary option might be understood as illegal. If any of the products offered by binary options trading platforms are security-based swaps, additional requirements will apply.
Also, some binary options trading platforms operate as unregistered broker-dealers. A person must register with the SEC as a broker-dealer in case he gets engaged in making securities transactions for the accounts of others. All the offerings made by any binary options trading platform, to buy or sell securities, effecting transactions in securities, and receiving transaction-based compensation has to be registered with the SEC. The organization has created an open list of registered brokers called the FINRA’s BrokerCheck.
Brokers make unregistered security exchanges by some non-discretionary ways. However, there are issues where the registered-broker is not obliged to register an exchange.
NADEX (North American Derivative Exchange): NADEX is an Exchange body that acts in between the brokers and the trader. However, they take tax from the investors as well as traders during all kinds of transactions. It is authorized by the CFT.They function more like a broker. At present, NADEX is the one and only U.S regulated binary options broker that is legally authorized to deal with the U.S. citizens.
CFTC Binary Options Regulation
Commodity Futures Trading Commission (CFTC) is a regulating body that regulates under the act of Commodity Exchange in the US. All firms and individuals who trade with the public or give advice about trading must be registered with the National Futures Association (NFA) in the United States. CFTC ensures transparency and open-marketing maintaining the competency at the same time, protecting frauds and safeguarding public fund. The brokers will have to abide by the law to do business with US residents and to make deals in the US market whereas it is not illegal for US residents to place their trades with offshore brokers. That is brokers registered in other countries cannot accept US traders, so traders can choose between few unregulated brokers who still accept them despite the high chance of being caught and fined. It is taken as illegal for brokers to accept offers, or enter into binary options transactions with U.S. citizens if those transactions are not conducted on a designated contract market. Exemptions are made with U.S. customers who have a net worth that exceeds $5 million.
In case some citizen purchases binary options from an unregistered broker, he may not get the full benefits and security provided by the federal security that is provided to the investors to protect their investment. In addition, individual investors may not be able to pursue remedies that are available for unregistered offers.
Regulation in Europe
The Cyprus Securities and Exchange Commission, well-known as CySEC, is the financial regulatory agency of the Republic of Cyprus and is probably the best known regulatory body in the world of binary options. Since Cyprus is one of the lesser developed economies in Europe, many investors tend to think of the country with little or no financial regulatory regime in place so that it will be easier for them to invest, but the actual reason is that taxes are low in Cyprus. The Commission has the obligations for supervision and proper control in inspecting the brokers. Without passing through the inspection, brokers are not allowed to deal with the investors in the country. There are careful observation and examination of all the necessary documents before clearance. Brokers are treated like financial companies and get bonuses too, but there are rules. The new legislation aims at uprooting the misuse of rights given to the brokers, for example in the case of improper mentioning of terms and conditions followed by blackmailing to withhold the withdrawal by the trader. The Commission noticed that the Terms & Conditions mentioned were usually not understandable. The bonus also is often used as blackmail to stop the trader from withdrawing the funds. All such practices are disabled under the functioning of the new legislation. Despite all these norms, a perfectly fair-trading is not possible. CySEC faces a lot of fraudulent activities of misconduct and scamming like all other binary option regulating bodies. Many cases became very popular, setting an example for the regulating bodies, so as improvements can be made in the policies. The brokers are found to be unregistered; warnings are issued against them.
Regulation in Australia
Australia is one of the biggest producers of Binary Options traders. Australian Securities and Investment Commission is an autonomous Commonwealth body. Every entity dealing with any provision of advice related to binary options has to be licensed by Australian Finance Services. When there is a suspicion about scamming, the licensing is retrieved. Opteck, a registered broker with CySEC but not in the ASIC, is an example of brokers that have been involved in scams or are unregistered and have been short-listed for public safety. The Australian customers are allowed to use brokers registered in New Zealand too. However, Australian Binary Options traders are well-known as traders who trade with biggest deposits, are well-educated and pretty much know what are they doing.
Regulation in the UK
Since 2005, it was called as betting and gambling. In the UK, amendments in the legislation are quite probable, and consumers may ultimately be offered a level of protection which they have not previously enjoyed. The UK had always been one of the primary countries when it came to forex trading in the past. Since forex trading is very similar to binary trading, UK authorities decided to legalize online trading also. Traders are allowed to invest with both the brokers regulated by the UK as well as by any other European nation that has similar regulatory rules. The brokers also of both kinds are permitted to do their business. Previously the control of binary options trading was left with the gambling commission. In 2015, there was the conduct of a consultation exercise to judge whether regulation of binary options would be better handled via the Financial Conduct Authority, FCA, the report on which still has to come. But it is important to earmark that FCA is not the official regulatory body in the UK at present, as the entire industry in the UK is in a transitional period.
Regulation in France
In France, binary options are not regulated but are legal. The French Financial Markets Authority (AMF – Autorité des marchés financiers) has blacklisted certain binary options considered risky, but the list is composed of every major binary firm. It is always recommended to the French traders to invest only with the European brokers.
Regulation in New Zealand
The financial authorities in New Zealand have waved the acceptance of legalization of binary options to bring the customers in comfort. Trading binary options are legal in the country. In fact, this new industry is taken as one of the most important components of the financial systems of the country. The country was keen enough to set specific regulatory rules so as to absolve fraudulent brokership and this job is undertaken by The Financial Markets Authority (FMA).
Regulation in Italy
CONSOB is the regulatory body in Italy. This assures transparent participation from all the brokers with no coveted information maintaining the accuracy of information about the brokers. The company names are listed where the people can safely invest. Italian authorities are quite strict when it comes to binary options trading, CONSOB issues warnings about unauthorized companies providing binary options services and fines with an amount as high as €500,000. When it comes to accepting the norms of regulatory bodies of other countries, all licenses issued by outside authorities are reviewed again and only after approval by CONSOB.
It is to be remembered that Binary Options are a financial innovation of the contemporary world, and hence not much work has been done by the finance authorities to set up a well-defined legal system for trade between investors and brokers. It is only recently that the regulatory framework to regulate binary options is being drafted out.
Even though binary options trading are quite easy, there is a large fraction of the population which is reluctant to invest.
For the past few years, the binary options trading had been compared with the gambling industry and largely been operating without any regulation. It is just obvious that many of the binary options brokers available on the internet are located in distant offshore places. Although, because of intense lobbying by consumer interest groups and regulatory bodies, there is a shift towards regulating the industry. Since the beginning of 2013, many nations took the agenda of creating a well-defined set of regulatory guidelines to the trading of binary options in their countries to safeguard citizens’ money. Although not completely satisfied and supportive to the completely regulatory industry, many leading brokers have understood that there are advantages of legitimacy.
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Michael Allen is the main author at www.binaryoptionrobotinfo.com. He holds a PhD in Economics and has worked in investment banking for 24 years.
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