Binary options are relatively new and until recently, not as closely regulated as other forms of trading. At first, they appeared as a refreshing opportunity to invest in a market attempting to rally back from global financial failures. However, unsuspecting buyers experienced unjust conditions, market infractions, thievery, and in some cases monetary ruin. In response, several countries have implemented measures designed to offer protection to binary options traders. Therefore, it helps to be aware of the current trading regulations and to understand what to look for.
The burden of regulation falls primarily on binary brokers in order to ensure that they are supporting the best interest of their clients. Brokers need to have a physical establishment with a respectable staff that is equipped to handle claim withdrawals. They must be prepared to undergo periodic regulatory enquiries. Client funds are to be separate from broker accounts so as not to suffer a loss due to brokerage bankruptcy issues. The purpose of these regulations is to prevent traders from fraud and unjust financial damage.
Regulation of Binary Options
Until recently, there has been little regulation in the binary options arena. Binary options received a reputation as a type of gambling rather than respectable financial trading. There was little segregation of funding sources. Government regulators failed to monitor binary options brokers. Binary operations were not always transparent and capital requirements remained open-ended.
Fortunately, the binary options situation for trading regulation is undergoing a transformation. As of May 2012, CySEC (Cyprus Securities and Exchange Commission) announced a change in binary options classifications. This development followed grievances regarding “bucket shop brokers operating in Cyprus.” As a result, the classification for binary options changed causing them become ‘financial instruments’ requiring regulation. This revamped policy was to go into effect late in 2012 and by late 2013, all binary options dealers had to conform to the new regulations.
Since then, Malta has transferred binary options status from the gaming industry to the Financial Services Authority. Japan no longer allows for trading options with expiration under two hours. Italy and Turkish industry regulators for financial services can legally block binary options IP addresses to selected brokers. France and Spain have warned binary options agents about regulatory status requirements. In the UK, the Financial Conduct Authority regulates binary options trading. In Australia, regulation occurs through the Australian Securities and Investment Council.
US Regulation and Trading
The US allows a single regulated dealer for binary options, NADEX. As such, it provides for trading on several instruments, regulated through the Commission for Commodities and Futures Trading. North America requires US citizens to report taxable profits to the IRS. Additionally, US law prohibits binary options traders from dealing with brokers from other countries.
Although the handling of regulatory requirements differs between countries, it is clear that both traders and binary options brokers must adjust to heightened standards or face potential financial loss.