The Value of Regulation for Brokers

With binary options expected to fall under FCA regulation at some point in 2016, what value will that bring for

In general, regulation is discussed in terms of the benefits to the consumer. Greater protection, better dispute resolution and increased confidence, for example. There is also another set of considerations of course – those of the firms set to be regulated.

The first reaction of operators having to comply with new regulations might be one of resentment. Regulation might be viewed as another set of rules and restrictions that will absorb time, effort and money.

In truth however, there are a raft of benefits that better regulation brings to brokers – and many in the binary options sector are looking forward to improved regulation. Here, we look to identify some of those benefits.

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Improved consumer confidence 

At first glance this appears like a benefit to the consumer, not the broker. It is of course, a benefit for both. There could well be a whole swathe of people currently looking at binary options, comparing brokers, putting together trading strategies, considering how to use binaries for hedging or improving their technical analysis skills – but they are not trading, because they lack faith in the current landscape.

That could represent a huge increase in customers and turnover for binary options brokers, once stronger regulation is introduced. The exact effect is an unknown – but similar regulations in Japan via the FSA saw a considerable increase in the use of binary options. This represents the single biggest reason brokers would welcome FCA regulation.

Clear definition of what ‘Binary options’ are

Again, that statement may appear strange, but a clear definition has actually never been made in terms of regulation. Binary options have been described, but it can be argued that existing financial instruments offer the same thing – if structured with the pure intent of recreating a ‘binary’ option.

Those existing instruments already fall within the regulations, so the problems perhaps stem from binary options being left out in the first place.

In order to regulate binary options, the FCA must first define them. While this poses some difficulties with expiry times, payouts and structure, a workable definition would be welcomed all round. Assuming it is correct…

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Reduced cost of doing business

A regulated business is likely to enjoy a better level of good faith and trust than a business with question marks hanging over it. Binary options brokers, however well operated, are still suffering from a tarnished reputation caused by others during the days of zero regulation.

Costs of banking, borrowing and money transfers are likely to improve where a firm can adhere to FCA regulations and illustrate their transparency and responsibility more easily.

In addition, the new regulations may open up new avenues for brokers in terms of where they base their staff and offices. This flexibility at least offers the long term possibility to ensure operating costs are as efficient as possible.

Opportunities for growth

The ability to operate in new jurisdictions is greatly enhanced with further regulations. The CySec regulations began this process, and it can only improve with the possible FCA offering.

MiFID and the impending MiFID II will bolster the hopes of firms looking to expand across Europe, and solidify the operations in existing markets.

There is little doubt that at present, binary options are looked down upon by much of the financial services sector. Again, largely due to historical issues, and as mentioned above – there is no clarity on what separates a binary option from more established instruments.

Certain media outlets and established websites tend not to cover binary options – through choice – but all that is likely to change if these options are classed, and regulated, along exactly the same lines as other financial products and services.

There will of course be downsides to increased regulation for binary options brokers. But the vast majority are still keen to see them introduced. As are related service providers such as trading platform operators.

The theme running through the binary options sector is one of out-dated views and assumptions holding back the growth of this particular financial vehicle. Much has changed in the last 5 years, and FCA regulation could be the catalyst for those outside of the sector to look at binary options again, and judge it on what is happening right now.

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