Back in December we had reported how CySEC, the market regulator in the jurisdiction of Cyprus which is a very popular hub for binary options brokers, published a consultation paper inviting the investment firms under its supervision to submit their comments and views on a series of proposed changes in the regulatory framework of binary options trading, aiming to make the reception and execution, or transmission, of orders fully transparent and fair to clients.
Back then we had also commented that the proposed changes appeared to be intending to interfere and attempt to amend “the fast pace of binary options trading that brokers boast of and may traders seem to prefer.” With the period for comments having elapsed on 31st December 2015, the watchdog, returns to the issue by sending out today, a circular to all the Cyprus Investment Firms which are providing services or intend to provide services in relation to binary options, whereby it effectively informs them that the amendments are being implemented and they are now expected to comply to and abide by them.
More specifically, through the circular, CySEC informs the CIFs that engage in the provision of binary options trading services that:
“A. Legislative framework
1. Chapter C, Part V (Provisions for the protection of investors) of the Investment Services and Activities and Regulated Markets Law of 2009, as in force (‘the Law’) lays down conduct of business obligations when providing services to clients from CIFs.
Β. Compliance with Law – Accepted Practices
2. For compliance purposes with Chapter C , Part V of the Law, CIFs must use trading platforms for reception and execution, or transmission, of orders, which, among others:
i. Provide adequate information to clients about binary options, so that there is full explanation and transparency.
ii. Operate in a way that is fair to clients.
3. For the purposes of ensuring compliance with the above provisions, the CySEC indicates in paragraphs 4-11 below, accepted practices applied in binary options trading platforms used by CIFs.
It is noted that these practices are not exhaustive and the CIFs are requested to establish and implement additional arrangements/procedures, having in mind the need for full transparency and protection of clients’ interests.
4. Information on the identification of the underlying asset of the binary option
Providing clients with sufficient information before buying the binary option regarding the identification and the type of the underlying asset of the binary option, including the trading venue [e.g. WTI Crude Oil (Dec 15) NYMEX]. This information is fully integrated and clearly displayed at a specific section on the trading platform or a relevant link referral to the website of the CIF is available.
5. Information regarding bid and ask prices of the underlying asset of the binary option – Strike price of the binary option
i. Providing to clients a continuous (per second) and smooth presentation of the flow of the bid/ask prices of the underlying asset of the binary option throughout the lifetime of the asset, such as those taken by the feed provider.
ii. Disclosure of the bid/ask prices of the underlying asset of binary option in a prominent way in the trading platform. For example, disclosure of the bid/ask prices on the area where the exercise price is presented, in which clients may buy the binary option.
iii. Adequate explanation/description of the bid/ask, and strike, prices in a prominent way in the trading platform (e.g. via a pop-up message). In particular, with regard to the explanation of the strike price, the methodology used to calculate it, whether it differs/deviates from (bid + Ask)/2 and under what circumstances/conditions this duration is possible.
iv. In case where bid/ask prices are not available for certain underlying assets (e.g. index DAX and FTSE 100), presenting the last price of the binary option and clearly indicating the trading venue.
v. Publication of the feed provider details, e.g. in the pop-up where the bid/ask price is explained/described.
6. Information on the bid/ask, and/or last, prices, at the expiry of the binary option – Expiry price of the binary option
i. Providing to clients the bid/ask, and/or last, prices at the expiry of the binary option.
ii. Adequate explanation of the expiry price of the binary option and the methodology used to determine the expiry price.
In particular, among others:
Reference to the relevant mathematical equation for the calculation of the expiry price [i.e. (bid + ask / 2), (last + bid + ask / 3)].
Explanation of the prices which constitute the expiry price (e.g. bid, ask, last). Where more than one prices are obtained by the feed provider at the second of the expiry of the binary option (e.g. 1/16/2015 10:11:01.424 am, bid 1.16394 ask 1.16404, 01/16/2015 10:11:01.885 am, bid 1.16395 ask 1.16404), clarification of the exact selection of data used.
Explanation of any rounding of the expiry price of the binary option.
Reference to the feed provider details.
iii. Maintaining historical records with the bid/ask, and/or last, prices at the expiry of the binary option, which they are accessible by clients for the trades they executed.
iv. The above information is concentrated in a prominent way in the trading platform. This information is fully integrated at a specific section on the trading platform or a relevant link referral to the website of the CIF is available.
7. Explanation of the graphs presented to clients
The graphs presented in the trading platforms are accurate, clear and understandable to the average investor as to the describing illustrations. For example, when the buyout, or average bid/ask, prices are presented, a clear reference to the price presented and explanation of the graph.
8. Information on the availability of the binary option
i. Possibility of entering buy orders of binary option (call and put), at any time and for any binary option that is available.
ii. In the case of unavailability of purchasing a binary option (call and put), clear
and visible information on this fact, as well as the circumstances/conditions under which this product is not available, before clients attempt to enter a buy order.
9. Buyout option of the binary option from a CIF
In case clients are provided with the possibility of the option of a buyout of the binary option from the CIF, full and accurate explanation of the buyout methodology.
10. Cancellation option of the transaction in a binary option
Providing clients an option to cancel their transaction in binary options, within a reasonable time after its execution, indicating any applicable conditions. The length of this option is not less than three seconds after the purchase of the binary option.
11. Provision of services in relation to binary options that have investment features
Provision of services in relation to binary options that are constituted and traded in a manner similar to other derivatives and ‘traditional’ financial instruments included in the Law.
Binary options with duration of 30 seconds are not considered to fall under the above.
C. Establishment and implementation of appropriate arrangements/procedures
12. CIFs are requested to immediately review their arrangements/procedures applied in the trading platforms that they use so as to ensure that these are in line and operated in accordance with the requirements of Chapter C, Part V of the Law and generally, with all the requirements of the Law. Where the CIFs are considered that additional arrangements/procedures are necessary to be established, are requested to do so immediately and not later than three (3) months from the date of this circular.”
It will be interesting to observe after the lapsing of this three-month “grace period”, whether CySEC will be strict with brokers as to the enforcement of these changes and whether the greater demands by the regulator will make it a less liked and sought after jurisdiction for brokers to be licensed in.