Binary Options regulation of brokers: History
Although investing in binary options can be both entertaining and profitable, binary options brokerages were largely unregulated in the past. This allowed unscrupulous operators and downright scam-artists to wreak havoc on the industry. Fortunately, reputable regulation bodies have begun to protect consumers.
The Cyprus Securities Exchange Commission (CySEC) is leading the way in creating a safe framework that allows binary options investors and honest binary options brokers to conduct business in a regulated environment. Licensing of binary options brokerages by EU securities commissions such as the FCA, AMF, CONSOB, BaFin, FMA and FSMA is also gaining momentum, drawing reputable binary options brokerages into their deserved place in the mainstream financial services industry.
CySEC, however, remains the leader in the regulation of binary options trading and CySEC membership can be regarded as the gold standard that ensures well-regulated binary options trading in the EU. Binary options investors are gaining increased confidence as they can be secure in the knowledge that their investments are safely and professionally handled and that in the rare event that they are not, recourse is available.
How regulated binary options work
A fixed return is offered to investors based on specific outcomes. If the outcome is achieved, the investor receives a fixed cash or asset return on their investment, if not, the initial investment is forfeited.
For example, an investor may make an investment based on the valuation of a currency. He or she may specify whether the exchange rate will be above or below a certain level on a fixed maturity date. Supposing that an investor bases the investment on an increase in the EUR/USD exchange rate. If, on the date of maturity, the rate is indeed higher than the specified value, the broker pays the investor based on the pre-determined percentage of investment pay out. If it closes lower, the investor forfeits his or her initial investment.
Because of its relatively short term investment duration, binary options trading was initially regarded as a form of gambling in many countries, but its recognition as a bona fide financial service is evidenced by CySEC’s recognition of binary options as financial instruments. Malta later followed suit, moving binary options brokerage regulation to its financial services authority rather than its gambling board.
(For a simple overview of binary options, read our entry level introduction What are binary options?)
CySEC regulation of binary options trading
In the early days of binary options trading, funds were not held in trust accounts and no outside regulator monitored them or ensured that transactions were fairly conducted. In 2012, CySEC announced that binary options would be considered as financial instruments and would be regulated accordingly. All Cyprus based binary options brokers were required to register their operations within 6 months of the May 2012 announcement.
In 2013, CySEC began to take decisive action against any brokerages in Cyprus that had not yet registered and suspended the licenses of binary options brokers who failed to comply with codes of financial best practice. Hefty financial penalties were exacted from certain binary options brokerages. These measures served to emphasise that CySEC are serious about the regulation of binary options brokers in Cyprus and dealt a decisive blow against those who hoped to operate ‘under the radar’.
Enforcement of binary options regulations
Today, CySEC closely controls Cyprus based regulated binary options brokers, ensuring that regulations are adhered to and levies penalties, issues warnings and withdraws licenses when binary options brokers are found to be in contravention of the relevant legislation. However, their initial 2013 crackdown was sufficient to make traders aware that contraventions would not be tolerated.
CySEC also welcomes public input and deals with complaints against its members dealing with market abuse and financial crime in accordance with current legislation. Complainants need not be citizens of Cyprus, but CySEC only has authority over purveyors of financial instruments such as binary options who are based in Cyprus. However, they are able to issue warnings to investors regarding purveyors of financial instruments elsewhere in the world.
Trading binary options in the US
Although investment in binary options is popular in the EU, it continues to be a grey area in the US. At time of writing, binary options (termed ‘Fixed Return Options’ in the US) are only legally available to those who purchase them using the American Stock Exchange, CBOE and Nadex. It is not legal for US citizens to purchase binary options from any other source.
Are binary options legal in the US?
The US Securities and Exchange Commission has laid charges against binary options brokers for illegal sales to US investors. The current stance in the US is already considerably more lenient than it initially was, and it is to be assumed that in the future, they will follow the EU in recognising Binary Options as bona fide financial instruments regardless of their source.
Is my binary options broker regulated?
Although other countries are beginning to react to the need for regulation in the binary options industry, the regulatory framework and enforcement of regulations is most stringent in Cyprus where the move towards regulation was first initiated.
CySEC membership is the surest indicator of a service provider that is monitored by an outside agency, maintains client funds in trust accounts, has sufficient operating capital and deals with its clients equitably, fairly and in accordance with regulations. Our brokers comparison table, and reviews, include a ‘regulated’ flag, clearly identifying brokers who are CySEC registered.
Who regulates binary options in the UK?
Conclusions on binary option regulation
Prior to 2012, binary options trading was unregulated and abuses occurred. Today, most binary options brokers comply with legislation related to the handling of financial services. CySEC membership ensures the most comprehensive regulation of binary options trading available and allows investors to earn excellent returns on intelligent binary options choices.