30 July, AtoZForex.com, Lagos – As the binary options industry continues to expand, so are authorities tightening their grip on the instrument which is regarded by some regulators as a complex financial product, rather than just a gambling tool. Malta has moved to fortify its rules on the licensing procedure of binary options trading operators. This is in addition to the standard rules applicable to Investment Services license holders, ensuring enhanced safeguards, considering the complex nature of binary options, the high risks associated with them and the perceived ease of accessibility retail investors to such products.
Excerpts from some of the rules applicable in the new MFSA binary options authorization procedure include:
- Operator is subject to a minimum initial capital requirement of €730,000. However, this does not preclude the MFSA from increasing this capital requirement on a case by case basis where it deems it necessary to do so.
- MFSA makes it clear that its interpretation of what constitutes an “instrument” is in line with the European Commission’s considerations on this matter. It highlighted the fact that “tradability” is not a necessary requisite for a binary option to qualify as an instrument. Bets and “binary bets” do not, however, qualify as an “instrument” and are therefore not licensable. If the applicant is not certain of whether an instrument qualifies as a binary option in terms of this notice, it could seek clarification from the MFSA, either directly or through its advisors.
- A customer must have the facility of limiting the amount to be invested, the losses which may be incurred, and the time to be spent trading in any one session. These may also be changed or revoked by the customer.
Also highlighting the difference between binary options and spread betting:
- Spread betting exposes the trader to uncapped losses, whereas binary options trading involves fixed gains and losses – thus, one would know the exact possible gains/losses to be made instantaneously.
As regards local presence:
- the MFSA expects that the core licensable activity of the company is carried out in and from Malta and no ‘letterbox’ entities purporting to have presence in Malta will be allowed. There also needs to be an element of dual control to ensure continuity of business and adequate oversight.
- The establishing of trading policies, limits and parameters, the monitoring and control of trades, the access and control of critical data, the selection of counter-parties and the establishment of pricing policies have to be performed in Malta.
- The company must also have a risk manager, who is locally based in Malta and is engaged on a full-time basis. This requirement is applicable irrespective of the volume of business of the company and no derogations shall be given.
Speaking on these new rules, Dr Omar Zerafa, Advocate at Zerafa Advocates explicates further on the details of Malta’s new rulings on binary options regulation.
Speaking on the type of license required, he clarified that: "MFSA would expect the promoters behind the application to have an established track record in the industry, previous operating experience within a regulated environment and a good track record in handling consumer complaints, amongst others. This approach ensures that any applicants for business coming to Malta are adequately prepared to operate within a regulated environment which is key to ensure compliance with all the applicable rules and regulations."
Speaking on the definition of binary options: "Of paramount importance is the classification of instruments as binary options which should be in line with the definition of the European Commission that includes, amongst others, derivative contracts relating to securities, currencies, interest rates or yields and derivatives relating to commodities that are settled in cash or that can be physically settled, provided they have the characteristics of other derivative financial instruments."
Based on the MFSA binary options regulations, it was also clarified that since there is no uniform definition of what constitutes a binary option, to determine the actual nature of the instrument, the MFSA will look into the actual substance and not the nomenclature of the instrument.
If the instrument falls within the definition adopted by the European Commission, then it can be considered a binary option. Interestingly, the MFSA has also clarified that the tradability or otherwise of an option is not a determining factor in establishing whether an option falls within the classification of instruments and therefore a binary option need not be tradable in order to qualify as such.