Trading Regulation and Regulated Binary Options Brokers
Regulations and Security Surrounding Binary Options Trading
Even though binary options have gained popularity during the last few years, many investors are still hesitating to invest in this market due to concerns about the regulations and security surrounding binary options trading. This heighten sense of concern is partly due to level of trust that investors have in the financial markets. In the light of the various financial scandals and crisis that had happened since the last decade in the U.S, the most tightly regulated market in the world, investors can be faulted for being too careful. Nevertheless, a lot of the current perception in the market about binary options trading is largely due to lack of understanding how the binary option market works.
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Binary Options Trading and the Regulatory Framework
Currently, one of the most popular locations for binary options brokers is the Republic of Cyprus. Because Cyprus is one of the lesser developed economies in Europe, many investors tend to think of the country as a financial backwater with little or no financial regulatory regime in place. In their mind, this is the reason why binary options brokers set up their operations there, to avoid being regulated. Actually, the reason why many brokers are located in Cyprus is just lower taxes. Corporate profits are taxed at 10% in Cyprus while in the U.K, it is 24%. In the U.S, it is even higher. Companies can be taxed up to 35%. When you consider the fact that the bulk of the binary options market is from Europe, it make complete business sense to be based in Cyprus. Many of you would also have noticed that most binary options brokers do not accept clients from the U.S market as they do not wish to be taxed by the U.S authorities.
Although many would argue that the financial regulatory standard in countries like U.K and Germany are higher as compared to Cyprus, this is because they have no clear understanding of how the Eurozone market works. In order the harmonized the regulatory framework of the financial markets within the Eurozone, the European Union (EU) parliament have issued the Markets in Financial Instruments Directive (MiFID). Designed to increase consumer protection and help to integrate the various financial markets into a single market, it should be noted that Cyprus, under the Investment Services and Activities and Regulated Markets Law 144(I) of 2007, is in full compliance of the MiFID.
Legal Protection Security
Hence, in terms of legal protection against rogue investment companies, Cyprus actually holds a higher standard in fiduciary duties than the U.K which is still lacking in full compliance of the MiFID. We have to remember that Binary options is a recent financial innovation and as such there is very little legal framework for regulators to work with. In addition, the OTC markets have always been largely self regulated which is why very little legislation exist to cover the trading of binary options. It is only recently that the regulatory framework to regulate binary options is being drafted out. In fact, Cyprus is one of the first Eurozone members that have a legal definition for binary options. And it with this legal definition that the regulatory authorities like the Cyrus Securities and Exchange Commission (CySEC) is empowered to act under the financial regulatory framework.
Investors might be surprised to know that binary options are not classified as “financial options” under the U.K’s Financial Services Act. Instead, you will likely find U.K based binary options brokers to be regulated by the U.K Gaming Commission where binary options trades are classified as “bets”. In the U.K, gambling debts are not enforceable in the courts. They are known as “debts of honour”. So imagine a situation where you try to sue a U.K based binary options broker for a “debt of honour”. In other words, there is no other place better than Cyprus in terms of the legal protection accorded to binary options traders.