Malta Binary Options as a Financial Instrument
In July 2013, the Malta Financial Services Authority (MFSA), via a formal notice, finally declared that Binary Options would henceforth be considered as a financial instrument falling within the ambit of the Investment Services Act. This clarification, was much welcome, since it finally put to rest doubts, as to whether Binary Options were to be considered as gaming, as therefore regulated by the Lotteries and Gaming Authority or by the MFSA. It is worth noting that until this notice, a number of Companies had successfully sought licensing by the Remote Gaming Regulations, and were therefore being regulated by the Lotteries and Gaming Authority.
It must be noted however, that this incertitude was not contained only to Malta, since an ambivalent and ambiguous stance, may also be observed in other jurisdictions, such as Cyprus, where the regulator Cysec considers binary options as financial instruments, whereas the UK Gaming Commissions has considered binary options are strictly pertaining to gaming.
However, following a clarification made by the European Commission to point (4) of Section C of Annex 1 to the MiFID (Directive 2004/39/EC), the regulatory status of binary options as financial instruments is beyond debate. Companies which were previously regulated by the Remote Gaming Authority must seek licensing under the Investment Services Act, through a series of transitory provisions.
What constitutes a Binary Option?
Binary Options are defined as contracts based on the direction which the price of an underlying asset will take within a specified time frame. Binary Options are derivative contracts with only two possible outcomes that depend on whether the forecast price is correct (in-the-money) or incorrect (out-of-the-money). Binary options are therefore a pairing contract, by which clients can trade at various prices, which may include commodities such as oil and gold, indices, equities and currencies, the outcome of which is settled in cash. The time frame various and may be set by traders, and may be as short as a 60 second option to several weeks / months.
Applicants intending to provide investment services relating to Malta Binary Options in and from Malta, will henceforth need to submit an application for an Investment Services Licence. Applicants wishing to provide binary options as a prime broker / own account will have to adhere to the requirements (local presence and share capital – minimum €730,000) of a Category 3 licence, whereas applicants acting as a white-label provider, whose role is merely the transmission of orders of the execution of third parties will have to adhere to the requirements of a Category 2 licence (share capital requirement – €125,000). In either scenarios, passporting rules may be availed of by successful licence holders. As with all companies, licensed under the Investment Services Act, the following licence conditions would have to be satisfied by the licence holder at all times:
Client funds are to be kept in a segregated bank account in a reputable bank established in a reputable jurisdiction;
- Regulated Binary options brokers will be subject to on-going monitoring by the MFSA, ensuring an adequate level of transparency and investor protection, as well as adherence to statutory standards aimed at ensuring ensure fair practice and transparent pricing;
- Binary options traders licensed under the MiFID regime will benefit from passporting rights under the directive, greatly reducing regulatory costs.
The regulation of binary options is a welcome move towards cementing Malta as a leading financial services hub, and seek to regulate a relatively recent yet innovative financial instrument, which has due to its characteristics, created a niche market in its own right.
Contact one of our officers to initiate the licensing for a Maltese Binary Option licence and start reaping full benefits of a reputable, low-tax EU jurisdiction. Simply fill in the contact box below or contact us by email on firstname.lastname@example.org or by calling at +356 2338 1500