Malta Financial Services Authority Publishes New Rules for Binary Options Operators

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Malta Financial Services Authority Publishes New Rules for Binary Options Operators

By Lex Yaranu | Monday, August 10th, 2020

The Maltese Financial Services Authority (MFSA) has finally made public its comprehensive set of rules regarding the conduct of binary options brokerage business in the tiny island.

This move finally completes the transition of the binary options market in Malta from the gaming industry to the financial services industry.

In coming up with the new regulations for the binary options industry, the MFSA took a careful look at the assets traded on a “win or lose” or “all or none” basis and made a distinction between assets traded as financial derivatives, and non-financial instruments (such as sporting events). A binary option according to the MFSA, is one in which the underlying event is financial in nature. Consequently, bets that are based on randomly generated assets or sporting events do not qualify as binary options and so companies who only offer these instruments CANNOT apply for a MFSA binary options license.

A summary of the new rules is provided below:

  • The owners of such companies must have an established track record in the financial services industry and must be proven to have a history of good corporate governance.
  • Companies that intend to provide binary options trading services are required to apply for a Category 3 Investment Services Licence, which enables such a company to hold clients’ money and offer trading services. Companies that own this license can also trade on their own accounts, allowing them to function as counter parties to trades.
  • Such binary options companies must have established presence in Malta.
  • Capital requirements are pegged at a minimum of 730,000 Euros. The MFSA will also reserve the right to impose higher capital requirements on companies on a case by case basis.
  • Companies wishing to obtain a MFSA binary options license must appoint the services of a risk manager on a full-time basis. Such risk manager(s) must be resident in Malta.
  • Preference is given to companies with white-label platforms developed by companies already established in the industry for such services. Companies that choose to develop proprietary platforms must subject them to IT auditors, and proof of satisfactory performance in the market must be provided.
  • Risk warnings must be provided on the company’s website at all times.

These are the main provisions of the new regulations regarding binary options services in Malta. Traders who want to trade with Maltese-based entities can therefore use these guidelines to perform their due diligence when choosing a binary options broker in Malta.

MFSA Issues Circular on Binary Options Trading

The Malta Financial Services Authority (MFSA) has issued a circular containing the additional conditions introduced for Investment Service Providers within Investment Services Rules in relation to binary options trading. The new conditions were issued in order to complement existing rules, particularly as binary options trading is considered to be a high risk practice.

Whilst those entities whose applications are still being processed are immediately subject to the new conditions, each existing license holder has a period of one year within which to become compliant in relation to shareholding structure conditions.

The circular contains certain conditions surrounding shareholding structure of Malta-licensed binary options operators. In order for an operator to be able to offer binary options, a Category 3 Investment License is required, also meaning that the operator requires a minimum initial capital of € 730,000, or more if required by the MFSA on a case by case basis.

It is important and interesting to note that the MFSA’s interpretation of “instrument” is in line with the European Commission’s interpretation of the term. Hence, “tradability” of the instrument is not a fixed requirement. However it is noted that “binary bets” do not qualify as an “instrument” and therefore are not licensable. The circular also explicitly explains that contrary to spread betting, binary options trading involves fixed gains and losses.

The fundamental activities of binary options trading, also referred to as “core licensable activities”, need to be carried out in Malta and a full-time locally based risk manager is required. Trading data must also be held at the Malta head offices by the license holder and an adequate online trading platform and off-site back-up system are also required. The circular also lists the required facilities that must be made available to the client and implemented on the trading platform in order to ensure customer protection.

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All the new conditions introduced to binary options trading in the circular will ensure that the highest regulations standards are maintained among Malta-licensed financial services operators.

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Malta Financial Services Authority Publishes New Rules for Binary Options Operators

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