CySec have done a 360 on their previous position regarding Binary Options. On the 4th May 2012 CySec issued a statement regarding the regulation of Binary Options. Previously CySec had held that Binary Options where not a final instrument presumably holding that Binary Options were more akin to online gaming.
However in there new statement they state they have decided that Binary Options do fall under their remit as the financial regulator of Cyprus. Meaning that those who wish to operate Binary Option platforms from Cyprus now have to gain CIF licence by November the 4th 2012. Companies were obliged to inform CySec of their intention to acquire such a licence from CySec within 30 days of the May 4th announcement or cease offering Binary Options from Cyprus.
What does this mean?
All unregulated binary options companies will have to stop operating in Cyprus by the 4th of November unless they have a licence application in the works. This will likely mean a number of Binary Option companies will up stick and move to other more favorable jurisdictions. However a number of companies will also apply for CySec licences.
One big obstacle to Binary Option firms will be coming up with the 1 Million Euro minimum capital requirement as many of these companies were opened as white label on a relatively small budget. A number of firms have already applied for licences and recieved them most notably S.O SpotOption Ltd. a company that provides platforms for a large percentage of the Binary Options industry.
Will other jurisdictions follow suit? Such as the FSA
In the particular case of the FSA, I feel it is unlikely due to the fact that both GFT and IG Markets offer regulated Binaries due to the fact they are offered in a contract for difference format. This means those in the UK already have access to a form of binary trading without using unregulated brokers.
The problem was also particularly difficult for CySec as a large number of unregulated binary option firms where operating from the jurisdiction due in part to the favorable tax and legal system. This led to a considerable amount of pressure being applied to the regulators at CySec to do something about the problem.
It seems more likely that other smaller jurisdictions may follow CySec’s lead and regulate binary options, especially if this attracts Binary Option providers open up shop within their jurisdiction. However there are still of plenty unregulated jurisdictions for rogue providers to up shop too.
Will this stamp out unregulated Binary Providers?
Almost certainly not as previously noted their are other jurisdictions where regulation is significantly lacking, notably Russia. There is also no pan European consensus on how Binary Options should be classified. For example there classified as a form of gambling or gaming in Malta. People will still have to be wary of who to open accounts with and who to undertake their trading with.
Though this must be seen as a step in the right direction.
Looking around at providers of CFD and Forex trading you will often find in the small print that they are regulated by CySec, short for the Cyprus Securities and Exchange Commission. For example high profile retail CFD provider eToro is regulated by CySec. As foreign regulation is often a worry for some people due to worries about the possibility of lack of regulatory oversight, we are going to take a look at CySec (and in the future other regulatory bodies).
CySec was launched in 2001 under section 5 of Cyprus Securities and Exchange Commission (Establishment and Responsibilities) Law of 2001 as public corporate body. The formation of CySec can be seen as one of the preemptive steps that the state of Cyprus undertook before joining the Euro in 2004. When in 2004 Cyprus joined the European Union they became part of MiFID (Markets in Financial Instrument Directive) allowing companies based in Cyprus access to all the markets in Europe. This has led a large number of retail FX companies to decide to base themselves in Cyprus. Traditionally Cyprus has been a tax haven and though membership of the EU has eroded its status as a Tax haven somewhat, it can be still been seen as a rather beneficial jurisdiction to operate from a tax point of view.
Some have also contended that CySec has one the weakest regulatory regimes within MiFID and that explains in popularity with Retail FX providers. I don’t have enough legal knowledge to determine if this is true. Though numerous familiar names have received fines from CySec for not compiling to the regulations required by those who operate under Cypriot law and some less well known organisations have licences withdrawn. For those who want to find out the rulings and regulatory decisions that CySec has made simply check their website at CySec.gov.cy.
If you take a look at the ruling against Easy Forex Trading Ltd made in 2009, it appears that CySec offer some serious regulation with Easy Forex being fined on multiple accounts of breaching the Cypriot regulation. Though some might question whether 45,000 Euros is an appropriate fine for such serious breaches of regulation. It should be noted that a number of changes in legislation where made between 2007 and 2010 in order bring Cyprus in line with the broad European Financial regulation framework.
Whether you feel safe trading under an account in Cyprus is probably a matter of personal judgement. I would recommend taking a look at the CySec site before undertaking financial transactions with a company regulated by CySec to check for previous regulatory breaches. It appears to me that CySec works reasonably well as regulatory body but probably has looser regulation than say the FSA (Financial Services Authority) the UK regulator. It should also be noted that tax reasons may be one of the contributing reasons why some Retail FX providers chose Cyprus as a base.