Do not invest more money than you can afford to lose.
The Cyprus Securities and Exchange Commission (CySEC) issued on Monday a consultation paper with enhancements to the regulatory obligations for the provision of investment services in binary options by Cyprus Investment Firms (CIFs). The regulator proposes there should be a minimum expiration requirement for binary options instruments of five minutes. In addition, the regulator intends to add the option for all binaries traders to exit a contract before it expires.
Currently there are no such standards and binary option brokers make such decision on their discretion.
The consultation period will run until 3 March and CIFs and market participants can submit their relevant comments and suggestions. After that, the CySEC will issue a circular on any definitive changes to the regulatory framework.
Below are the new regulatory standards for binary options trading that the CySEC is proposing:
The proposed standards aim to ensure brokers act in clients’ best interest and provide fair transparent services. They provide traders with more adequate information.
Overall, the CySEC proposes five fundamental reforms to eliminate deficiencies in the existing regulatory framework for binary options, and establish new standards and measures to ensure retail investor protection. Following are the five fundamental reforms:
- Removing opaque strike pricing: in order for clients to know the exact strike price beforethe contract is tradeable, the calculated strike price at execution must be exactly the same as the strike price communicated when the order is placed. Strike prices must be the same for all clients and floating strike prices are not permissible.
- Quoting potential outcomes real-time: in order to enhance pre-trade transparency prices must be quoted as an evolving bid-ask spread, representing clearly the percentage probability of an outcome occurring.
- Lifting restrictions on exiting trades: In order for clients to be able to exit their positions at any time throughout the life of the contract, CIFs must provide a continuous, two-way pricing. Clients must not have to wait until the contract’s point of expiration to exit the position.
- Banning sub-5 minute tenor trades: in order to remove shorter-term volatility and protect against “binary bets”, contracts must have a minimum tenor of 5 minutes.
- Standardising trading and settlement methodologies: in order for the expiration value to be a fair representation of the true market at the moment of the Digital Option Contract’s expiration and to avoid its manipulation therein, algorithms for the calculation of expiration and settlement values of the underlying market must follow CySEC’s predetermined methodology. Individual methodologies peculiar to one CIF are not permissible.
“Binary options products as we know them today carry deficiencies and do not provide retail investors with adequate protection when investing in such high risk and complex financial instrument,” Demetra Kalogerou, Chair of the CySEC, said. “The proposed reforms now under consultation will enhance the nature, characteristics and trading methodology of this type of retail financial instrument. Crucially, these reforms will standardize trading in Binary Options, bringing significantly greater transparency to investors and better terms for the investors when executing orders, thus provide enhanced investor protection,”she added.
Last year, the Cyprus Securities and Exchange Commission (CySEC) altered forex and binary option regulations, making it harder for brokers to meet its requirements. In April the regulator introduced new rules specifically for binary option instruments. In November it announced the ban of bonuses as a measure to attract clients and the introduction of lower default leverage cap (50:1) for forex and contracts for difference (CFDs). The changes were triggered by the recommendations and guidelines of the European Securities and Markets Authority (ESMA) from mid-October in regards to forex and binary options regulation.
To read the CySEC’s consultation paper, please click here.
