CySEC regulates Binary Options – will the FSA follow?

Cyprus’ financial markets regulator CySEC has become the first EU and MiFID-member regulator to deem that binary options are indeed “financial instruments”, as defined by MiFID, and as such can only be offered by licensed and regulated companies.

CySEC’s move should hurt the variety of unregulated binary options firms which have sprung up lately, offering an alternative to “standard” FX and CFD trading. As well this will hurt the software firms which rent out their trading systems to these unregulated firms, in return for (typically) volume-based payments.

The change came after a two-year lobbying effort led by Limassol-based regulatory advisory firm Map S.Platis, run by Stelios Platis, both with CySEC as well as EU authorities in charge of setting and implementing MiFID, the “Markets in Financial Instruments Directive”, which sets certain rules and minimum standards for all EU-member financial regulators.

CySEC has become a leader in the online trading regulation, putting in place standards which often exceed those required by MiFID. For example, minimum capital required by Forex (and other) firms which hold client money and take orders is €1 million in Cyprus, versus the 33%-lower €750,000 minimum required by MiFID, the standard in most other EU countries. Combining CySEC’s increasing perception as a credible regulator, Cyprus’ full EU membership, low tax rates and an educated and experienced workforce (with financial instruments), Cyprus is increasingly a home-of-choice for online trading startups. Larger firms as well, such as Alpari and most recently Saxo Bank, have recently opened Cyprus branches.

It will be interesting to see if other EU regulators, notably the UK’s FSA, take similar steps. Today, the FSA does not consider financial over-the-counter binary options to be a financial instrument, and as such they are regulated as a gaming activity.

For more on Forex regulation see the LeapRate Dow Jones Forex Industry Report.

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