How Regulation Is Changing Binary Options Trading

Nancy B. Alston

Recent developments in the world of binary options trading and regulation have made a dramatic impact on the brokers who sell these securities. Over the past twelve months the fallout from the global financial crises of 2012 has directly impacted the majority of players in the digital option industry.

How a Financial Crisis on a Tiny Island Impacted Traders Globally

Anyone who has been around or investigated binary options trading knows that the vast majority of companies who operate these platforms headquarter or run their operations out of offices on a tiny island in the Mediterranean Sea called Cyprus. A banking crisis in 2012-2013 on that island has dramatically changed how tiny $200 fixed-return digital options contracts are traded today.

A Brief History of the Banking Crisis on Cyprus

Most people on the planet have never even heard of the tiny island of Cyprus – located in the Mediterranean Sea. Politically divided Cyprus had made itself into a financial hub in the new millennium, making itself into a kind of eastern-European high-rollers club for wealthy people looking for a safe place to stash their cash and invest it in high-yielding assets. A great deal of the money flowing into the country came from wealthy Russian and Ukrainian businessmen looking for a place to put their money beyond the reach of their governments. Cyprus was more than happy to accommodate the billions of rubles, dollars, euros, and hryvnia (Ukrainian currency).

Funny thing is though, the more money that seems to pour into tiny financial havens like Cyprus, the greater probability that the governments and or central banks running those countries will go bankrupt… as did Cyprus in 2012. After much wrangling with the European Union and IMF, Cyprus worked at righting the ship by requiring depositors to “bail-in” some of their investments to re-capitalize the banking system. Needless to say this created quite a flight of currency out of Cyprus, effectively making the problems worse rather than better near-term.

Strengthening of Securities Regulation a Key Outcome of the Crisis

One of the major outcomes of the financial crisis and banking collapse in Cyprus was the demand that stronger regulation exist in the banking system, and in financial derivatives markets in particular. What this ultimately meant for retail traders in Forex and fixed return markets like binary options was that their brokers needed to meet regulatory requirements and register with CySEC (the Cyprus Securities and Exchange authority) as well as meet compliance regulations within the Eurozone financial regulator (MiFID). This has provided greater transparency for customers / traders (customer accounts must be segregated from broker funds, minimum capital requirements met, and a certain amount of securities account insurance as provided under MiFID). A major drawback for non-Eurozone residents, however, is that brokers meeting the CySEC registration and regulations are no-longer able to accept non-Eurozone residents. That has left outsiders no choice but to trade with brokers operating in countries other than Cyprus – either within their home country or at one of the few remaining non-regulated brokers outside the Eurozone authority.

Next Post

The Necessity of Information Governance and Data Classification for Complying With the GDPR

Approaching the new General Data Protection Regulation (GDPR), effective from May 2018, companies based in Europe or having personal data of people residing in Europe, are struggling to find their most valuable assets in the organization – their sensitive data. The new regulation requires organizations to prevent any data breach […]