Binary Options Regulation, a contentious issue?

Binary Options represent a growing area of the Over-the-counter financial product industry. But many of the players in the market place are not subject to regulation. This puts those who wish to trade Binary Options in a very precarious position, as Binary Options are a unique product that many people would be interested to trade. Especially as I feel that many of the options offered by these new start up providers may be mispriced. But I would be extremely nervous about trading with an unregulated broker.

Why is this new market widely unregulated? Well it appears that the regulators that are part of MiFID, do not wish to take responsibility for their regulation. A recent statement by CySec (one of the members of MiFID) has stated that they do not believe that Binary Options do not count as a financial instrument under law (Check question 6 here). This is patently absurd as they clearly are a financial instrument, this has lead many providers to base themselves in Cyprus in order to avoid regulation. Recently the French financial regulator issued a warning about unregulated Binary Option providers on their website (Can be found here). Update: 20th Feb 2013: On the 4th May 2012 CySec issued a statement regarding the regulation of Binary Options, you can read the full story here.

This leaves many providers taking the Gaming Route. It is much easier to become licensed as gaming firm in a European country such as Malta at the cost of about 40-100k. This is a somewhat unsatisfactory middle ground to take. A regulated gambling firm is clearly desirable to no regulation at all and is the route that was recently taken by Binary Options site OneTwoTrade.com. Though again I would prefer if a complicated financial instrument such as Binary Options fell under financial market regulation such as the case is with Financial Spread betting in the UK.   

Well what are your options if you want to trade Binary Options but with Financial Regulation provided by a financial regulation. The answer unfortunately is their seems to be only one established provider and that is GFT whose Binary Options platform is regulated by the UK by the FSA. This regulation is provided by the FSA, as the Binary Options are provided in the form of CFD’s or as a Financial Spreadbet. Again not a perfect remedy to the situation but this seems the best that is on offer at the moment.  

If you want to see more widespread regulation of Binary Options throughout Europe I suggest that you apply pressure to the regulatory regime in your country. By doing this more pressure will be placed on regulatory authorities and they may take heed and hopefully take action.

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