UK Binary Options Regulation
Is Binary Options Gambling or Investing? Is there any difference? This post casts an eye over the possible stance of the FCA and their attitude to UK binary options regulation.
UK binary options regulation will (next year?) become the responsibility of the UK Financial Conduct Authority (FCA). As the status of binary options continues to exercise the minds of the good and great in the financial regulatory offices around the world, now the UK’s FCA (reluctantly) joins this merry throng.
Binary options, until now, have been considered gambling in the UK and as such have been regulated by the UK Gambling Commission: ‘until now’ because the UK has now decided that binary options are to be regulated by the UK’s Financial Conduct Authority (FCA). Is this an implicit acceptance that binary options trading does not comprise of gambling and is a bona fide investment or is it the UK once again doffing its cap to Brussels and imposing legislation it does not like, support or agree with?
When the UK’s largest spreadbetting company, IG Index, first introduced binary options they were marketed as ‘Binarybets’; indeed, they had a separate website binarybet (although that is now just a link to their composite IG Index site) and this was regulated by the precursor to the UK Gambling Commission.
The IG page that the above binarybet link redirects to spurns the use of the term ‘binarybet’ now preferring to use ‘binary type’ or ‘binaries’, except when referring to their regulation when ‘binarybet’ is used. So, on the IG site is offered an insight into the confusion reigning over the status of binary options; a binary option is termed ‘binary’, ‘binary type’ or in conjunction with regulation, a ‘binarybet’ but never a binary option, whereas a variable ‘tick-size’ future is referred to as a ‘spreadbet’ and is regulated by the FCA!
Department for Culture, Media and Sport
The UK’s Department for Culture, Media and Sport (DCMS) on August 5th sent the following letter to the UK Gambling Commission who have published it: DCMS Letter. The assertion that: “Binary options are a form of fixed odds bets on financial markets” followed by: “This would bring binary options within the remit of the Financial Conduct Authority (FCA), in line with standard European practice” suggests possibly that this move is a move that the authorities are not entirely comfortable with. Should the regulatory authorities, in particular the FCA, drag their feet on the issue it remains to be seen how long binary options in the UK will be unregulated since ‘operators will not, for the time being, require a gambling operating licence to offer binary options’.
A final comment on the above DCMS letter pertains to the statement ‘Operators who offer binary options alongside more traditional betting products will merely find this part of their activity regulated by the FCA’. Many sports bookmakers and casino operators will at present have zero exposure to financial products apart from binary options and subsequently will not already have ‘activity regulated by the FCA’. It remains to be seen whether these particular operators wish to jump through the more rigorous hoops that gaining binary options regulation from the UK FCA recognition will require. If these operators do decide to attain FCA approval then along with the new binary options providers attracted to the UK market there could be a considerable application backlog.
FCA Definition of Binary Options
The DCMS has defined a binary option as a fixed odds bet yet is overseeing the transfer of regulation from the Gambling Commission to the FCA. Clearly a new definition of what exactly constitutes a binary option is urgently required since the reference to a fixed odds bet is now obsolete.
There are a number of aspects of financial instruments in general that need to be considered in defining this ‘new’ investment, e.g. time frame, settlement price, margining, price format and presentation just for starters.
- Time Frame
If the time frame of the life of the option is just 60 seconds does this qualify it as an FCA ‘investment’? If the time frame is deemed to short then why is High Frequency Trading with sub-second in-and-out deemed to be an ‘investment’ and permitted?
- Binary Options Strategies
The NYSE’s ByRDs follow the mistaken and common acceptance that binary options have to settle at 0 or 1(00). Combinations of binary options mean that the settlement price does not have to settle at 0 or 1(00), e.g. a ratio of two binary calls could provide settlement prices of, say, 0, 40 & 100. Just as a conventional call spread (made up of two conventional call options) is still considered conventional options trading, binary options strategies (made up of a combination of binary options) are still binary options trading.
Will the FCA now permit the margined trading of binary options? Logic would suggest that since the UKGC used to be considered the correct regulatory environment owing to the fixed odds nature, i.e. the client could not lose more than was wagered, then this particular attribute could be ignored.
- Price Format
Will a binary option be a binary option if it is offered in the percentage return format that has become so prevalent and popular? The mathematical formula of a binary option price is constrained by the lower and upper limits of 0 and 1 respectively. Will this pricing format be rigidly adhered to or will a factor of 100 be permitted, i.e. a range of 0 – 100? Alternatively bookmakers offer the odds in the sport fixed odds style, e.g. 6/4, 11/8…. will this constitute a binary option?
Who is to say that one cannot trade financial markets, e.g. GBP v USD in the form of a game of bingo, a virtual horserace or a virtual game of roulette?
Pioneering Binary Options Regulation
The FCA has the opportunity to take CySec’s pioneering good work and provide binary options regulation in one of the foremost financial centres of the world. The credibility the Japanese FSA’s binary options regulation has given to binary option trading in the Far East should not be underestimated. The UK’s FCA is in a position to do the same in Europe providing it does not take too much self-interested advice from market participants who attempt to tailor the FCA’s product restrictions to facilitate their own products and eliminate the innovation brought to the marketplace by new product providers.
This should and could be one of the easier products for the FCA to regulate since assuming that providers will not offer short-term margining the retail public can only lose what has already been placed in their accounts. This also applies to the providers so unlike spreadbetting companies that require many millions of financial collateral to support the unknown losses they may incur, binary options providers are able to always know in real-time what their maximum downside risk is.
Providers and users of these simple, retail-friendly and limited risk instruments must hope the FCA does not drag its heels and miss the opportunity to give the binary options industry the credibility it so urgently seeks.