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Regulation Of Binary Options

Updated on February 2, 2013

Binary Options Regulation Is Helping The Industry To Grow

Binary options regulation is helping the industry to grow and gain mainstream acceptance.
Binary options regulation is helping the industry to grow and gain mainstream acceptance. | Source

Why Do We Need Binary Options Regulation

There are four simple reasons why we need binary options regulation. Regulation means that...

  1. Money deposited in binary accounts is held in a trust, protecting it from bad business practices and unscrupulous brokers.
  2. Binary options platforms and brokers are held accountable by third party monitoring. This helps to ensure fair play and relative safety for binary options traders.
  3. Regulation brings transparency. Binary options brokers, platforms, businesses and advisors have to reveal their business structures and practices. This is another safety catch for binary traders.
  4. Regulation also allows for the standardization of binary options. Standardization helps the binary options industry to better serve its customers and ensure fair play.

Regulation Brings Credibility To Binary Options

The growing industry of binary options has a well deserved reputation for scams and unscrupulous brokers. Although binary options have been around since the beginning of financial trading the practice has only recently gained wide spread use. The rise of the internet and the ease of access it allows for traders around the world are the underlying cause of the surge in binary options activity.

The binary options industry began its explosion around 2007-2008. European style binary options had become an established avenue for speculating the world financial markets. U.S. based exchanges sought to jump on the wagon. Proposal and rule changes by the OCC (Options Clearing Company) and the SEC (U.S. Securities and Exchange Commission) paved the way for the American Exchange and the Chicago Board Of Options Exchange to begin listing binary options on a few heavily traded underlying assets. The AMEX has the most listed binary options, ranging from indexes to ETF's and individual stocks and commodities. The CBOE lists only two types of binary trades, the S&P 500 and the VIX. Both of these exchanges offer binary options with simplified all-or-nothing options based on whether the underlying assets close higher or lower than the purchase price.

What Is A Binary Option

Binary options are a simplified form of options trading. Binary options are a fixed-return trading vehicle with only two possible outcomes.

  1. The underlying asset closes in the money and you receive the maximum return.
  2. The underlying asset closes out of the money and you lose your investment.

Binary options are usually an all-or-nothing proposition. If you trade $100 and the underlying closes out of the money then you lose $100. Some binary options trading platforms, like AnyOption.com, offer a rebate on losing trades. AnyOption.com offers a 15% rebate on losing trades and an average 70% return on winning trades. In order to come out ahead traders typically have to be right about 55% of the time. Because the win/loss payout structure is weighted to the broker many critics view binary options as pure gambling and speculation.

Click here for more information on how to trade binary options.

What Is The Difference Between European And American Style Options

  • European options are a fixed return trading vehicle offering only two possible outcomes; Maximum return or maximum loss. American options values are based heavily on the price of the underlying and its movement. Factors such as delta, theta and volatility have a huge impact on American options and no impact on European options. It is possible for an American style option to close in the money but still result in a net loss.
  • European options are only cash settled. At expiration you will either lose the amount traded or win the fixed return. American style options could result in the trader having to buy or sell shares of the underlying asset.
  • European options are only assignable at expiration. You have to hold them until the expiration of the options and only then will you be able to receive the payout. American options are liquid and tradable whenever the market is open. You could be called out or assigned at any time between purchase and expiration.

What Is The CFTC

The Commodities and Futures Trading Commission (CFTC) is an independent U.S. government agency that regulates the futures and options markets. It was created in 1974, replacing a previous agency, to uphold the mandates set forth in the Commodity Exchange Act, 7USC. The Commodity Exchange Act was passed in order to curb fraud in commodity, futures and options trading.

  • The mandate of the CFTC is to protect the public from fraud, manipulation and abuse. It is also expected to promote an open, competitive and stable futures and options trading market.

The CFTC has received a lot of criticism over the years. The original commissioner quit after her powers were severely limited by others acts of congress. Policies of the CFTC, especially pertaining to the exclusions, are blamed for much of what led to the 2008 world financial crisis.

Exchange Versus Non-Exchange Traded Binary Options

Non-exchange traded binary options have been available over-the-counter (OTC) for quite some time. These options were usually part of a larger options strategy and sold by the issuer directly to the buyer. Because these options were offered on the private market and not through an exchange they were subject to heavy manipulation and fraud. The Commodities and Futures Trading Commission (CFTC) was set up in 1974 with the mandate to protect the public from fraud and abuses.

One move that the CFTC has made is to ban the trade of non-exchange traded options, except where they are excluded from regulation. The work of the OCC and the SEC has helped to standardize binary options in the U.S., provide continuos quotes and allow for the free trade of binaries as a financial instrument.

  • Exchange traded binary options are binary options offered through a recognized binary options exchange. They are available to the trading public and are therefore "protected" from fraud.

CySEC's Mandate

  • Supervise and regulate the Cyprus Stock Exchange, transactions, listed corporations, brokers and brokerages.
  • Supervise and regulate licensed investment services and companies.
  • Grant licenses to investment firms, brokers and brokerages
  • Impose sanctions and penalties to brokers, firms and consultants who fall under their purview

Cyprus Is Leading The Way In Binary Options Regulation

Cyprus and its securities and exchange commission (CySEC) is leading the regulation of the binary options industry.
Cyprus and its securities and exchange commission (CySEC) is leading the regulation of the binary options industry. | Source

CySEC Regulates European Style Binary Options

Because of the banking laws in the country of Cyprus many international financial institutions have flocked there. This includes international banks and binary options brokers. The rise of binary industry (there were about 90+ binary options platforms in existence at the end of 2012) has caused the Cyprus Securities and Exchange Commission to recognize binary options as a financial instrument and therefore enact regulation on brokers operating in Cyprus.

CySEC changed the designation of binary options to financial instrument in mid 2012. All Cyprean based binary brokers are required to comply. Because of its member status in the European Union, and subsequently its participation in MiFID regulation, CySEC regulation is becoming a much sought after designation for top binary options brokers around the world. Once they meet CySEC requirements these brokers then have access to all financial markets in the 27+3 European Economic Arena.

MiFIB, The European Economic Arena and Binary Options

MiFIB, otherwise known as the Markets In Financial Instruments Directive, is the group of European Union laws governing the EU financial markets. Since it's inception in 1993 the MiFIB has been amended to reflect the evolving EU financial system. It provides for the regulation and harmonization of the financial markets of the 30 member European Economic Arena(EUA). The purpose of the directive is to increase competition and consumer protection while allowing the financial services of member nations to operate throughout the EUA.

The directive distinguishes between actual "investment services" and what they refer to as "ancillary services". Anything qualifying as a an investment service is regulated by the MiFIB and therefore can use the EU passport to operate in any of the EUA countries. The MiFIB covers nearly all tradable financial instruments but does exclude some currency conversions. Under the amendments to the MiFIB the "home state" or country of operation is responsible for regulating the investment service but can operate in any EUA nation under the rules of the passport.

Cyprus, The CySEC and Binary Options Regulation

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The Cyprus Securities and Exchange Commission is leading the way in binary options regulation.

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