Regulation of Binary Options
Recently, BO has been the subject of close attention by the entire industry. We can observe active debates taking place in different countries regarding the classification of these instruments.
In some countries they are criticized by regulators and other authorities (e.g., Canada, France, Italy), together with proposals to classify these instruments as gambling. Somewhere, they are banned altogether (Israel).
On the other hand, in the most developed countries, from the point of view of regulating financial markets, these instruments are classified as financial and regulated accordingly. I am talking about such countries as the USA, Great Britain, Japan, Cyprus and other countries under the MiFID directive, although, to be fair, it should be noted that the French regulator AMF believes that it is not enough to have an MiFID license to offer BO in France.
In order to understand the reasons for negative attitude to these instruments by a number of countries, we analyzed official statements and publications of regulators and other authorities.
It should be noted that the opponents of AMF highlight two reasons that, in their opinion, make this instrument gambling:
This is a market for the purchase of predictions, not the actual purchase of securities.
The probability of correct prediction at short time intervals is extremely low, which makes trading in these instruments based on guessing, not on prediction.
The opinion of the other side is that these definitions are suitable for any other speculative transaction in the market. Moreover, if the underlying asset of a binary option is a security, and the payment and value of the contract are determined by the volatility of that underlying asset, then it is a financial instrument and its trading should be supervised by an appropriate supervisory authority.
Looking at the experience of the United States and Japan, it can be seen that a compromise was found and implemented through the introduction of certain conditions for granting BO trading.
1. Minimum Expiration Time.
With this measure, regulators are trying to make binary options trading more conscious, as it is believed that trading at very short intervals lacks the analytical component. Also, at longer intervals, there is no possibility of price manipulation. For example, in the USA the minimum contract duration is 5 minutes, while in Japan it is 2 hours.
2. Prohibition on blocking the client's trading without significant circumstances.
3. Fixed payout level of the option, which cannot be changed during the whole period of the option.
4. Displaying payout information for a series of trades so that traders can assess the risk in advance.
5. Displaying information on the maximum number of contracts for each instrument.
6. The possibility for a client to withdraw from a contract before its expiry.
7. Disclosure of information about traders' success.
8. Prohibition of options advertising as an easy way to invest.
9. As well as a number of other requirements.
Initially, Binary Options was conceived as a simplified way of entering into a transaction in the market (simply as a "yes" or "no"), which will be available to the investor with any trading experience. However, the developers of Binary Options platforms, pursuing a simplification model, have significantly transformed these instruments. A great variety of contracts has appeared, and as a result, some contracts can no longer be called simple. This has led to the fact that in a number of jurisdictions where BOs are subject to the supervision of financial regulators, trading has been standardized.