Before you consider choosing a broker to trade with, you have to be certain that the broker has all the right credentials and is most importantly, regulated. Unregulated brokers have been operating in the market and have provided for numerous complaints.
When a broker is properly regulated, you have an authority with the governmental agency where you can officially lodge complaints and have the broker’s license pulled.
It is also important that you as the trader know which regulatory authorities you can trust and whether the broker you are using is keeping to the standards set out by that particular agency. In this post we will go over broker regulations in the Europe and the Unted States.
Regulation in the EU
When it comes to Binary Option broker regulation inside the EU, one of the most important inititatives is that of the Markets in Financial Instruments Directive (MiFID). This was designed to improve consumer security by combining all of the different financial agencies into a harmonised directive. Essentially, it is an agreement by all 28 nations in the EU including Iceland, Norway and Liechtenstein whereby regulation in one country applies to the rest of the signatories.
What this means is that if a broker is regulated by a country within the EU, then it is allowed to offer its services to citizens within the EU. When it comes to most Binary Option and Forex brokers, they decide to use Cyprus as their regulatory agency.
Many people see being regulated in Cyprus as somehow insufficient and question why brokers don’t decide to regulate in a number of other EU countries. The main reason that brokers choose Cyprus as a place to regulate and operate their business is because of the favourable corporate environment. Cyprus has low corporate tax rates and affordable offices etc. Naturally, it is cheaper to run an effective broker business out of Cyprus than it is in London or Paris for example.
CySec or the Cyprus Securities and Exchange Commission is the responsible for financial market regulation in the Cyprus. CySec is responsible for issuing all licenses and will get involved should a client have a dispute with a broker. CySec will investigate trader reports to examine the protections afforded to the trader. Cysec is also responsible for regulating the Financial products on the Cyprus stock exchange.
In order for a broker to be regulated by CySec, all of the investor’s funds are required to be held in a segregated trust account. This ensures that the trader’s money is separated from the funds that the broker uses for running the business. Similarly, by regulating with CySec, brokers are required to operate with a great degree of transparency and must open their organization up to anybody who can legitimately request it.
What is most interesting about CySec is that they are one of the first government agencies to actually set out regulations for the relatively new Binary Options industry. For example, in the UK, there are no regulations in place to deal with Binary Option brokers aside from the OTC investment instruments the banks trade.
Regulation in the US
In the U.S., in order for a broker to provide its services to American citizens, it must be approved by the National Futures Association (NFA) as well as the Commodity Futures and Trading Commission (CFTC). Many people consider U.S. regulators to be quite stringent in their requirements. However, the US regulatory system is more ethical guidelines than entrenched laws.
Even though these are guidelines, the CFTC will indeed get involved in cases of a broker with a questionable record that has mistreated clients. This was the case of Banc De Binary which was accused of offering options off-exchange.
Regulation of Binary Option and Forex brokers is a key requirement when it comes to your protections as the trader. These agencies are usually one of your last port of calls if you have a dispute with your broker. It is important that you understand your rights with each of these agencies.
However, although these regulations should give you some comfort, they should not be your only piece of due diligence. Past customer reviews as well as questions to the broker before investing can go a long way in avoiding any issues.
If you are looking for a broker to trade stocks check out our tips on choosing an online stock broker page.