MFSA Circular on Binary Options Trading
Trading in binary options is considered to be a high risk practice and therefore the MFSA has issued a circular setting out additional conditions in this regard which complement those conditions set out for Investment Services Providers within the Investment Services Rules. The circular causes the conditions to apply to entities whose application is currently being processed. However, with regards to the shareholding structure conditions, the applicant has a period of one year within which to ensure he falls in line with this notice.
The first clarification provided in the circular is that a Category 3 Investment License is required to offer binary options. This also means that an operator is subject to a minimum initial capital requirement of €730,000. However, this does not preclude the MFSA from increasing this capital requirement on a case by case basis where it deems it necessary to do so.
The MFSA makes it clear that its interpretation of what constitutes an “instrument” is in line with the European Commission’s considerations on this matter. It highlighted the fact that “tradability” is not a necessary requisite for a binary option to qualify as an instrument. Bets and “binary bets” do not, however, qualify as an “instrument” and are therefore not licensable. If the applicant is not certain of whether an instrument qualifies as a binary option in terms of this notice, it could seek clarification from the MFSA, either directly or through its advisors.
The differences between spread betting and binary options trading are also clarified in the circular. Spread betting exposes the trader to uncapped losses, whereas binary options trading involves fixed gains and losses – thus, one would know the exact possible gains/losses to be made instantaneously.
Certain conditions relating to the shareholding structure of Malta-licensed binary option operators have also been set out in the circular. The authority reserves the right to request the submission of audited accounts from any corporate shareholders and a statement of wealth from any promoters. The board of directors and other staff occupying senior positions must abide by the competence requirements.
Although binary options trading is usually carried out electronically, the MFSA requires the fundamental licensable activities to be carried out in Malta. This includes, inter alia, the establishment of trading policies and pricing policies and the monitoring and control of the automated trades. A full-time locally based risk manager must be employed and no derogation from this requirement will be allowed. On the other hand, outsourcing of certain activities are allowed provided that they are not one of the aforementioned “core licensable activities”. Liquidity providers/counterparties must be adequately licensed by the applicable authorities within the EU/EEA or other jurisdiction.
The license holder has the duty to preserve all trading data at the head offices in Malta and ensure the existence of an adequate back up system which should be offsite. The system being used by the applicant must be certified by qualified IT professionals. Online trading platforms that are recognised as industry-standard within the industry will be given preference by the MFSA over proprietary systems.
Consumer protection measures have also been introduced so as to safeguard the rights of the consumer given the high risk environment of binary option trading. Among others, the company is to display appropriate warnings on its website on the riskiness of binary options and the very real possibility of losing the entire sum invested. Tutorials on developing the necessary skills and limiting trade risk must also be provided.
A customer must have the facility of limiting the amount to be invested, the losses which may be incurred, and the time to be spent trading in any one session. These may also be changed or revoked by the customer. In addition, a counter must be displayed showing the balance in the customer’s account, and a “reality check” must be shown every hour. This “reality check” would effectively suspend the page and inform the customer of the length of time he has been trading for and the profits and losses made within such time. The customer must then confirm that this message has been read, and must have the option to end the trading session or to continue trading.
The circular represents valuable clarification within the industry given the increased interest in binary option models, whether as a stand-alone operation or as part of a wider offering, and serves to provide operators, professionals and the wider public with a clear indication of Malta’s on-going commitment towards maintaining the highest standards of regulation amongst Malta-licensed financial services operators.