Are Binary Options Regulated? How? Where? By Whom?

As binary options become more and more popular among online traders we are getting a greater volume of queries regarding the regulatory aspect of binary trading. In other words how, where and by whom are binary options regulated? As a result we thought it would be good to create a separate post on just this subject to give you the full lowdown regarding the current state of play vis-à-vis licensing and regulation in the binary options industry.

To give you the short version of the answer, currently most of the industry is completely unregulated. There are some organisational bodies that allow binary options to be traded in certain jurisdictions but there is no one regulatory body, disallowing unregulated companies and granting licenses to those that are regulated.  If you have done any research on the subject you will have found that practically every binary broker out there claims to be regulated. This is simply not true. The only officially licensed binary broker at the time of writing is Banc De Binary, which as of January of 2013 is licensed and supervised by the Cyprus Securities and Exchange Commission (CySEC).  Now on to a more comprehensive breakdown of the situation.

US Binary Option Regulation

The CBOE (Chicago Board of Exchange) is an exchange on which a finite number of binary contracts are available for purchase. The CBOE’s sister organisation, the CBOT (Chicago Board of Trade) was the first place that over the counter binary options were listed when they were approved by the Securities and Exchange Commission of the US. The CBOE is fully regulated and makes a very small number of binary options contracts available to investors, however these types of options are significantly more complicated than those offered by retail binary options brokers online, and they require a much larger investment, making them prohibitively expensive for most small traders. As such they are normally used by banks, hedge funds and big-time traders in order to diversify their portfolios and hedge existing positions.

Nadex is another alternative for those looking for legitimate regulated binary options contracts in the US. Nadex is owned by IG the well-known CFD (contract for difference) Forex broker.  This is the only online exchange where you can purchase binary options and which is regulated in the United States. However again the range of assets is limited, the cost of entry is more expensive than many other binary brokers and regulation is only there inasmuch as the assets themselves are overseen, not the company’s business practices or how it treats its customers.

Vanilla Options. Vanilla Options have been around for ages, you are perfectly free to design your own Vanilla Options however this is a much more daunting prospect for the type of trader interested in binary options who is reading this article. Vanilla Options require a great deal of economic know-how as well as understanding of the instrument itself, and this is way beyond the level of most part-time traders. Vanilla Options are indeed regulated, but their complexity will inevitably cross them off most people’s lists.

European Binary Options Regulation

Vanilla Options are licenced and regulated in Europe as well as in the states. However the retail online binary options that most people reading this will end up trading are also becoming regulated in Europe. The landmark ruling took place at the end of 2012 when the Cyprus Securities and Exchange Commission granted the first regulatory license to an online binary options broker, Banc De Binary. This company is to date still the only regulated broker of binary options and under the 2004 MiFID (Markets in Financial Instruments Directive) ruling Banc De Binary is now able to import its licence into any of the 27 EU member states and begin trading in those countries. It won’t be long before other companies and indeed jurisdictions follow suit. There have been some rumours surfacing that the second European country to be offering regulation will be Malta and this first license is due to be granted in mid 2013. Regardless of this Italy has recently moved to block certain brokers’ IPs from being available to Italian citizens. There currently seems to be a debate as to whether binary options are gambling or investment vehicles and it is likely that this will be a race against time for either regulation or action similar to what happened to online gambling over the last decade.

British Binary Options Regulation.

As with pretty much every other location Vanilla Options are fully licenced and regulated in the UK too.

Retail brokers of binary options are not currently regulated in Britain unless they have already acquired Forex licences and are now opening binary divisions within them. There are a number of stand-alone binary brokers that are regulated in the UK, IG and GFT immediately come to mind, however these are not retail in the truest sense of the word and are quite expensive to trade on. Binary options as a financial product are not yet regulated in the UK. Many retail brokerages are now trying to get regulated in the UK as it is a very big and as yet largely untapped market. Beware of the difference between regulation and registration. Many companies have registered with the FSA, and even receive a handy little registration number they can quote to their clients, however they are not regulated. Registration simply means they are able to approach the British public for custom.

Middle Eastern and African Binary Options Regulation

In the Middle East and Africa binary options are not regulated at all. Some websites have popped up claiming that binary options are compliant with Sharia law, and others offering specialised versions of their options to employ a No Riba Policy (i.e be able to hold positions open for an undefined period of time) as well as allowances for Hibbah, which is the enabling of gifts to be made voluntarily and with nothing expected in return). Some attempting to ban binary options in the Middle East are using the gambling argument, which is odd considering that Vanilla Options are traded in the Middle East and they do not differ greatly from retail binary options.

Australian Binary Options Regulation

The ASIC does not offer regulation or licensing for binary options in Australia. Binary options are permitted to be traded in Australia, both by brokers based in and out of the country. There is currently no ban on any type of binary trading activity in this country.

Other Jurisdictions.

There is a regulatory framework in Japan, Singapore, and Hong Kong but again it is a grey area over there as nothing has been made 100% official, i.e no firms have been banned, although the Japanese did move to block certain binary broker ISPs just as Italy has done recently.