The MFSA has just published its policies on the licensing of binary options trading operators. Apart from the standard rules applicable to Investment Services Licence holders, these additional policies ensure that enhanced safeguards are in place, taking into consideration the complex nature of binary options, the high risks associated with them and the accessibility of such products to retail investors.
What type of licence is required? This licence also permits the licence holder to deal on own account. The MFSA would expect the promoters behind the application to have an established track record in the industry, previous operating experience within a regulated environment and a good track record in handling consumer complaints, amongst others. This approach ensures that any applicants for business coming to Malta are adequately prepared to operate within a regulated environment which is key to ensure compliance with all the applicable rules and regulations.
What are the capital requirements? The capital requirements are EUR ,, however the MFSA may require an increased capital requirement taking into consideration the scale and volume of business of the service provider. Of paramount importance is the classification of instruments as binary options which should be in line with the definition of the European Commission that includes, amongst others, derivative contracts relating to securities, currencies, interest rates or yields and derivatives relating to commodities that are settled in cash or that can be physically settled, provided they have the characteristics of other derivative financial instruments.
Unfortunately, in the binary options industry, there does not seem to be a uniform definition of what constitutes a binary option and therefore, to determine the actual nature of the instrument, the MFSA will look into the actual substance and not the nomenclature of the instrument. If the instrument falls within the definition adopted by the European Commission, then it can be considered a binary option.
Interestingly, the MFSA has also clarified that the tradability or otherwise of an option is not a determining factor in establishing whether an option falls within the classification of instruments and therefore a binary option need not be tradable in order to qualify as such.
There are certain instruments that fall outside the scope of the rules such as a bet or option on the outcome of an event which is not of a financial nature. The fact that the event is of a binary nature, such as a win or loss in a sporting event, does not mean that the instrument qualifies as a binary option as the underlying event is not of a financial nature. Do we need to be owned by an entity which is licensed? The MFSA has revised its previously restrictive requirement that every applicant for business has to have a qualifying shareholding by a licensed entity operating in the same line of business.
The position of the MFSA is that if the applicant for business is not already licensed, the MFSA may require shareholding by a licensed entity on a case by case basis, taking into consideration the following: The shareholding structure; b.
The quality and track record of the proposed management team; c. The target market; d. The result of the due diligence investigations; e. The capital structure being proposed; and f. The level and nature of operational and business risk involved. Therefore this requirement is not automatically applicable but it shall be determined on a case by case basis.
What qualifications should the Directors and employees have? The members of the Board of Directors should collectively have the required competence and experience and this should be specific to the binary options trading industry. These competence requirements also apply to individuals who would occupy senior positions and who report directly to the Board, such as the senior manager, the risk manager or the head of trading. The Board of Directors should also include a local board member based in Malta and an independent board member.
Are there any local presence requirements? There also needs to be an element of dual control to ensure continuity of business and adequate oversight.
The establishing of trading policies, limits and parameters, the monitoring and control of trades, the access and control of critical data, the selection of counterparties and the establishment of pricing policies have to be performed in Malta.
The company must also have a risk manager, who is locally based in Malta and is engaged on a full-time basis. This requirement is applicable irrespective of the volume of business of the company and no derogations shall be given. Can we deal with any counterparty? With respect to the liquidity providers of the company and other counterparties, the company should only appoint regulated financial services firms, authorised in the EU, EEA or another jurisdiction that has a regulatory framework similar to that in Malta.
What records are we expected to keep? The company would be expected to have real access to and control over all transactional data and such data shall be fully preserved in the records of the company on an ongoing basis at the head office of the company in Malta as well as backed up offsite.
Can we develop our own trading platform? If the company will be using a proprietary trading platform developed in-house, the company should either have such platform certified by an independent and duly qualified IT auditor or provide evidence that it has sufficient track record through its use on the market. Nevertheless, the MFSA would prefer applicants for business that use a well-renowned platform that is being used in the industry.
What consumer protection measures are we expected to adopt? Due to the particular nature of binary options and their accessibility to retail investors, one of the most important requirements is to ensure that the company has implemented adequate measures to ensure enhanced consumer protection and to create awareness of the risks involved. In this regard, the company is expect to display, at all times, on its website and other promotional material, the relevant warnings on the riskiness of binary options and on the risk of losing the entire sum invested.
The company is also expected to provide demos and tutorials on developing trading kills, the placing of online trades and limiting trading risk. There is also a requirement to issue warning to clients during a trading session where cumulative frequent trades are undertaken over a short period of time, highlighting any accumulated losses. The traders should also have the possibility to set limits on the amount that may be invested, limits on losses that may be incurred, limits on the amount of time spent trading in one session and exclusions from investing in specific types of binary options.
This requirement is very similar to that imposed by gaming authorities and is intended to give the trader sufficient self-control over his trading activities. Apart from the above requirements, there are other measures that are applicable in relation to retail investors, including appropriateness tests, and additional disclosures and reporting requirements.
Can we passport our licence to other EU Member States? It is the obligation of the licence holder to ensure that the trading of binary options is accepted and permissible in the particular EU Member State.
The above highlight the additional requirements with respect to operators of a binary options trading platform.
The other requirements and obligations relating to a Category 3 Investment Services Licence also apply. This information was supplied by and represents the perspective of Dr Omar Zerafa of Zerafa Advocates The following two tabs change content below. Screenshot of a breaking news alert e-mail from Q2 Please check your email to confirm your subscription. We hate SPAM and promise to keep your email address safe. The following two tabs change content below. Latest research from Andrew Saks-McLeod see all.
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