Binary options brokerages have been at the center of the discussions of financial regulators worldwide. Some regulators, like the Israeli Security Authority, have banned this activity. Others, like the Canadian and the French regulators, are constantly issuing warnings and new regulations, making binary options activities in these countries more and more challenging.
The core discussion revolves around the question of whether binary options is a financial instrument, or gambling. One of the main complaints aimed at binary options brokers is regarding their call-centers, which are considered by some as too aggressive.
Another practice that has been scrutinized is the recognition of brokerages regulated by third countries and acting as market makers.
All these practices and more were discussed during Finance Magnates’ interview with Demetra Kalogerou, the Chairwoman of the Cyprus Securities Exchange Commission (CYSEC).
This article is the second part of the special interview with the head of CySEC. Read the first part here.
CySEC remains one of the sole global regulators of binary options. Lately, some regulators (like the Israeli ISA) have decided to disallow binary options in their jurisdictions. Is CySEC considering taking that kind of decision?
“We were the first regulator to accommodate the financial binary options segment in 2012, which upgraded the level of regulation firms offering investment services in these instruments are subject to. We took this decision in accordance with a consultation with the European Commission, as it ruled out that financial binary options should be categorized as financial instruments under MiFID. Therefore, for the European jurisdiction, it is a financial instrument like all the others, until it is otherwise decided on an EU level.”
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Currently, CySEC recognizes third country licensed brokers to act as market makers to a broker registered with CySEC. Do you foresee any changes in that policy from both CySEC and EU perspectives?
“This conduct is allowed under MiFID, as long as the CIFs are in position to demonstrate why they choose a particular market maker. We sometimes see problems with this practice depending on in which third country the marker maker is licensed in, since firms acting as market makers may be incorporated in countries that do not adhere to the provisions of MiFID or an equal framework or may not be subject to regulation at all.
Potential problems would arise when money is handled in those countries rather than in Cyprus, making it difficult to supervise and to track if something should go wrong. We are examining these practices now and we will see how we are going to deal with it.”
Do the call centers create problems, and in what way?
“Investment firms licensed under MiFID may outsource technology and marketing. While outsourcing the technological support abroad does not generally pose problems, we are troubled by the latter. When it comes to outsourcing of marketing, we know that some CySEC regulated firms cooperate with call-centers in EU member-states and third countries. Marketing of financial instruments and services is a very important function, but some of these call centers may employ aggressive marketing and thus risk misleading or pressuring the investors. It is imperative to ensure that qualified individuals are recruited and somebody is there and in charge to directly oversee them. Of course, CIFs must have in place effective internal mechanisms to monitor at all times the activities outsourced to call centers.
Based on CySEC’s experience so far and having identified deficiencies in the monitoring of these call centers, CySEC is considering to require the CIFs to only perform these activities internally from their offices in Cyprus or only through a branch, tied agent or regulated entity based in another jurisdiction. It is provided that all sales people will be well trained and pass CySEC’s exams.”
Glenn Stevens, the chief executive of Gain Capital, has criticized CySEC in the past for allowing “passported” broker firms to register problematic customers, with names like Kermit the Frog and Mickey Mouse. How do you respond to those claims?
“The financial industry is a very dynamic and highly competitive one. It is no secret and CySEC has a commitment to developing a competitive industry. At the same time, it is heavily regulated and all firms should adhere to the rules designed to protect investors. Transparent client onboarding underpins the way the companies CySEC regulates do business effectively. CySEC ensures that the firms licensed in Cyprus have to follow strict onboarding, KYC and AML procedures according to the Third Anti-Money Laundering Directive.”
The full interview, including additional questions and answers, can be found in the new issue of the quarterly industry report.