This article was written by Yael Warman, Content Manager at Leverate.
The Cypriot regulator seems to be on a roll with its voraciousness and over-reaching aspirations to become a reputable and respected financial regulatory entity in Europe. Last year, after years of being known for its lax approach to financial regulation enforcement, CySEC stepped up its game by issuing an unprecedented number of fines and entering into an equally impressive number of settlements with several FX and binary options firms licensed on the island. Now, the regulator has extended its reach yet again, this time to cover the binary options market in an attempt to safeguard investors.
Let’s take a look at the changes CySEC has implemented on its path to becoming a prominent regulatory entity respected throughout the EU:
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Liquidity Providers and CySEC
As part of a sweeping wave of new regulatory changes aimed at maintaining a more transparent and safe environment for investors, a recently issued consultation paper reminds CIFs of their responsibility to monitor the accuracy of execution of traders’ orders. CyEC has also issued conditions for the selection of liquidity providers, suggesting that liquidity providers be regulated within the EU and require a capital ratio of at least 10% in the event of an investment firm deciding to contract services from a liquidity provider regulated outside of the EU.
Social Trading and CySEC
The rapid growth of social trading within the forex industry has caught the attention of the regulator. In an effort to protect traders form exposing too much of their capital by copying a master with a risk approach greater than their own, CySEC has issued guidelines to social trading platforms. These involve the determination of an investor’s risk tolerance prior to allowing him/her to social trade, the ability to set stop loss levels that are coherent with an investor’s risk tolerance and financial stability, the issuance of warnings advising investors when nearing certain risk thresholds, and the employment of a dedicated portfolio management by brokerage firms to screen traders and help manage their risk.
Binary Options and CySEC
Binary options have been in the crosshairs in the latest wave of regulatory enforcement, with significant changes being required from brokerages which maintain their own call centers. Under the new rulings of CySEC’s latest consultation paper, brokerage employees are not allowed to give financial advice or engage in aggressive marketing practices such as frequent phone calls, assertive convincing or applying pressure on customers. In addition to this, customer support personnel must use real names, and possibly the biggest-impacting piece of new regulation is the fact that customer support call centers must be located within an EU member state.
CySEC is dedicated to significantly improving the transparency of the financial industry and the protection of customers and has effectively shown that it means business. This increasing strictness in regulation, combined with rising acquisition costs and a surge in competition, is putting heightened pressure on brokerages. Binary options brokerages which may feel as though their businesses are nearing the end of their days in Europe are already looking at FX as a solution to staying afloat, by shifting their existing business model to forex. Unregulated brokers are getting increasingly nervous as well.