A topic that is often brought up is the state of the regulation of Binary Options with the financial industry. It is a fact that up until now, companies have been able to set up operations under the radar of official regulation.

This lack of financial regulation has had two notable effects. Firstly it has seen many existing traders and investors steer clear of this method of financial speculation simply because of this.

Secondly many brokers have faced charges of malpractice and manipulation in their dealing with trading clients. Certainly if binary options want to be recognized as a legitimate method of investment then something needed to be done.

Regulation Of Binary Options

Regulating companies on a global scale is of course no easy task. This is not a new problem and is one that has also affected the governance of other financial operations. This includes those companies involved in foreign exchange dealing and stock trading and investment.

In these arenas regulation has been left to the regional legislation of the country in which the institution conducts its main operations. This has however led to different standards and criteria being applied around the globe, causing many companies to establish operations where the local regulation less stringent.

The classification of binary options as an investment product has also made the boundaries unclear.  The over the counter (OTC) transactions used in in this form of trading are in some regions classified under betting laws. As no actual investment in the underlying asset in many parts of the world binary trades don’t fall under the heading of legitimate financial investments.

The huge uptake in this form of trading has however forced a re-evaluation of the laws governing the operation of companies dealing in such services.

The first moves towards towards implementing regulation of binary options have now been put into motion. In May CYSEC (the Cyprus Securities and Exchange Commission) announced that companies operating as binary options brokers would fall within the remit of the Investment Services And Activities and Regulated Market Law of 2007-2009 - (full announcement here).

This change means that any brokerage operating within the region would have to apply for a Cyprus Investment Firm (CIF) license to be able to continue with their current operations.

Many of the more popular brokers operate from this region. The benefits to this were that they could take advantage of more lenient financial laws and of course company tax breaks while still operating within the European Union. Therefore these new changes are likely to shake up the industry and will see many of the more popular brokers moving under the wings of the regulator if they are to continue with their current operations.

Indeed since the announcement of required binary options regulation,  many trading platform providers such as SpotOption and Tradologic have embarked on modifications to the back office of their dealing platforms. This task has been undertaken to help brokers transition to the requirements of this new regulatory landscape.

What these changes actually mean?

For the regulated binary option brokers, filing returns, checking out the integrity of their staff and coming up with their two year business plans will help to keep the regulator happy. We should perhaps not belittle the efforts of the regulator to make the world a safer place and naturally such moves are of course welcome. But let us not forget the current financial crisis and how ineffectual international regulators have been (and continue to be) in dealing with the banks. Also it bears mention that many of these problems originated in some of the most regulated financial markets in the world – notably the UK and US. So don’t believe that regulation will cure all ills.

Regulated Binary Options Brokers

The truth is that regulated binary options brokers may be a step in the right direction. But will this step actually address the concerns of the trader?

Segregated accounts for client funds will provide deposit protection which is a welcome step. However whether it will address traders concerns of sometimes questionable pricing or clearer terms and conditions remains to be seen. Also exactly what this means for US traders is yet another question. Will US clients be able to continue trading with digital contacts once the the legislation takes effect? Maybe that is a question to investigated in another post.

With brokers having already been gearing up to meet the required changes over the past few months, the chances are you have already been trading with a regulated broker for several months, albeit one without an official stamp of approval.