The Malta Financial Services Authority (MFSA) has today made an official announcement that it is to categorize binary options under the scope of the Markets in Financial Instruments Directive, 2004/39/EC, (MiFID).

Following in the footsteps of Cypriot regulator CySEC, which recognized binary options as a tradable financial instrument in 2012, the MFSA confirmed to Forex Magnates in March this year that it was preparing to take the steps to regulate binary options as a financial product.

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With the Japanese Financial Services Agency having implemented its regulatory structure for binary options, a very popular product in Japan, very recently and platform providers showcasing their Japan compliant platforms at yesterday’s Forex Magnates Tokyo Summit, it is evident that regulatory authorities worldwide are working toward acceptance of this method of trading and providing a framework for its operations.

Gaming or Trading?

Prior to this step made by the MFSA, binary options firms could apply for regulatory supervision in Malta under the Lotteries and Gaming Authority (LGA).

The MFSA forged an arrangement in March this year to transfer the responsibility away from the LGA, and proposed that binary options brokers will fall under the Investment Services Category 3 license, and that all brokers will be subject to a minimum capital requirement of €730,000.

The applicable regulatory requirements will be those under MiFID. These requirements are described in the Investment Services Rules and Regulations. Every company licensed in Malta is subject to on-site and off-site compliance.

The regulator stated that in the light of this interpretation and after taking into consideration the manner in which binary options are classified and regulated in other EU Member States, the MFSA wishes to advise that binary options are considered to be instruments falling within the parameters of the Second Schedule of the Investment Services Act (Cap. 370) which is itself modeled on MiFID.

The MFSA classifies binary options as being contracts based on the direction the price an underlying asset will take within a specified time frame. Binary options are therefore defined by the regulator as being a type of derivative contract with only two possible outcomes that depend on whether the forecast price is correct or incorrect.

The Next Cyprus?

In May, at the iFXEXPO in Cyprus this year, a panel of lawyers which specialize in providing legal consultancy to the FX and binary options industry hosted a discussion about the pros and cons of setting up a business in Cyprus, and the factors which have led the island to become a host nation for FX and binary firms.

The overall agreement on this matter was CySEC’s regulatory acceptance of binary options had played a large part in making this an attractive location for online trading firms to base their operations.

It could well be that Malta views itself as a similar environment and wishes to garner its share of market participants by providing a regulatory structure to attract them to establish within the country.