One of the most notable landmarks in the development of the Binary Options sector took place in May 2012 when the Cyprus Securities and Exchange Commission (“CySEC”) formally announced that Binary Options fall within the scope of financial instruments listed in the Investment Services and Activities and Regulated Markets Law (the “Law”), thus Binary Options brokers operating in/via Cyprus should be licensed by CySEC as EU-licensed Cypriot Investment Firms (CIF). This, however, was not an easy win for the sector. CySEC’s announcement, was in fact the result of continued and persistent efforts by MAP S.Platis, who researched, argued and lobbied with a number of EU Regulatory Authorities as well as the European Commission in order to include Binary Options as a Financial Instruments at a time when many EU Regulators argued that Binary Options are nothing else than a gambling instrument.
The Law categorises the services available to be provided by CIFs into two broad categories:
A ) Investment services.
B ) Ancillary services.
Investment services include, among others, the provision of brokerage services (including STP and execution of client orders), the activity of market making, portfolio management, investment advice etc. Ancillary services include, among others, safekeeping of funds and securities, granting credits and loans under certain conditions, advisory on corporate finance matters, currency conversion services, and investment research.
Obtaining a CIF authorisation requires the applicant to go through a sophisticated and demanding licensing process, which usually takes between four to six months to complete, depending on a number of factors, including ones’ choice of consultant.
A Binary Options broker who seeks to obtain a CIF authorisation must, before submitting an application to CySEC, decide for which investment and ancillary services it wishes to obtain authorisation. Binary Options brokers can be broadly classified as either agents or market-making firms. An agent-type binary options broker would typically require licensing for the investment services of ‘reception and transmission of orders’ and ‘execution of clients orders’ and if it wishes to hold clients funds then the broker needs to be licenced for the ancillary service of ‘safekeeping of funds’. The minimum capital requirement for an agent-type broker is 200,000 Euro. A market making-type broker, is required to obtain a license for the service of ‘dealing on own account’, in addition to the services of ‘reception and transmission of orders’ and ‘execution of clients orders’, while the minimum capital requirement for such a licence is 1,000,000 Euro.
A CIF authorised by CySEC, is entitled to do business throughout the EEA without the need for separate authorisation from the competent authority in the member state where it wishes to carry out business. This principle is known as the ‘Single Authorisation’ or ‘Passporting’ for investment firms.
The Law sets out basic information requirements and fiduciary duties of CIFs towards their clients, known as ‘conduct of business’ rules. The aim of the conduct of business rules is to create a level-playing field in client protection, and at the same time provide regulators and investors the ability to discern and discipline inefficient and poor conduct by CIFs. The conduct of business rules applicable to Binary Options brokers include, among others, requirements for client categorisation (retail or professional), duty to provide best execution, provide specific reporting to clients, offer prescribed pre-account opening information, transparency, issue risk warnings, apply protection tests and more.
The Law imposes a number of requirements pertaining to the internal organisation of CIFs. The most important organisational requirements applicable to Binary Options brokers include segregation and non-use of client funds, participation in the investors’ compensation scheme that will reimburse retail investors up to 20,000 Euro in the event of the broker becoming insolvent, as a measure to prevent of conflicts of interest and more.
Cyprus apart from being one of the first European jurisdictions to regulate Binary Options, offers a number of competitive advantages to brokers wishing to establish themselves in the EEA. Among these benefits are: a competitive tax regime, a business friendly regulatory environment, advanced regulator, highly skilled and educated work force well versed with financial sector matters, double taxation avoidance treaties with over forty three countries and multiple bilateral cooperation treaties between non-EU competent authorities (such as Israel, Hong Kong, China etc.) and CySEC. In addition to these benefits, having a European investment firm license adds prestige and recognition to a brand.
This article was written by december