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CSA Announces Ban on Sale of Binary Options with Short-Term

The Canadian Securities Authority announced on the 28 0f September 2017 it was adopting a new Multilateral Instrument 91-102 Binary Options Rule targeted at banning the trading of binary options with an expiry period of fewer than 30 days. The ban will come into force on December 12, 2017, across all Canadian jurisdictions (except British Columbia), although some jurisdictions are subject to government ministerial approvals before the new rule can take effect.
 
The Binary Options Rule became necessary as the CSA begins a proactive campaign of clamping down on fraudulent activities related to binary options trading in Canada. The new rule is part of a multi-faceted action plan by the CSA to fight binary options fraud, owing to the increasing number of reports from people who have fallen victim to binary options scam. This has prompted securities regulators in the UK, US, and Australia to issue investor alerts to their citizens on the risks of trading binary options.
 
Binary Options
 

What is a Binary Option?

 
A binary option is a type of trade in which there are only two outcomes; win or lose. The binary option is used to trade different types of assets ranging from currency pairs, commodities, stocks, indices and so on. If the investor predicted correctly specific predetermined events about an underlying interest, the trade is a win, and the investor receives a fixed payout. Otherwise, the investor loses all or a significant part of their investment.
When a binary options broker is fraudulent, it creates an impression that leads a trader to believe that they are trading based on the real market price, however, on closer inspection, one discovers that the prices used by the trading platform are at variance with the market trend at that moment. One is led to believe that such dubious prices have been pre-programmed into the trading software to make sure the odds are against the undiscerning traders.
 
Binary options take different names and forms and vary according to trading platforms. Some of the names include one-touch options, all-or-nothing options assets-or-nothing options, and cash-or-nothing options and so on. The CSA plays the role of regulators in the trading of binary options because the body regards binary options as securities or derivative contracts that fall within its purview.
 
According to the CSA, many of the binary options products and platforms are designed to scam unsuspecting investors. They employ desperate sales strategies using phony trade advisors, brokers and account managers. They also force their clients to reveal most of their personal information such as passport numbers, credit card numbers, SINs, etc. under the guise of security reasons ( even though this can be used for identity theft) and they also fail to remit wins to their traders.
 
While the sale of binary options is not legal in Canada, the product has been widely publicized and sold through online platforms operating out of Cyprus, Israel, and other places. There have been moves by Quebec to implement a rule similar to the Binary Options Rule, but the plan was shelved to adopt the CSA’s regulation. On its part, British Columbia will not be adopting the new rule, but no binary options trade is allowed in the territories under its jurisdiction due to the risks and fraud involved in the industry.
 
Binary Options
 

Purpose of the Ban

 
The Binary Options Rule is expected to prohibit every aspect of the binary options marketing, sales, and trading in Canada. Some of the goals of the Binary Options Rule include:
 

  • – Protection of prospective investors from falling victim to binary options fraud.
  • – To create awareness among would-be investors about the illegality of trading binary options.
  • – To deter would-be investors from the illegal promotion of high-risk products such as binary options.
  • – To paralyze the distribution, advertising, and payment process for binary options.
  • – Note that exemptions from all parts of the Binary options rule may be granted where applicable.

 

Prohibited Binary Options

 
Some of the binary options prohibited under the Binary Options Rule include:
 

  • Automatic exercise: Refers to a binary option where the buyer or seller can’t make any decision after entering the contract.
  • Underlying interest: Investors can’t buy or sell any underlying interest related to; an election, security, interest rate, currency, index, commodity, price, rate, benchmark, or variable.
  • Payout structures that offer a predetermined fixed monetary reward.

 
After the announcement of the rule, the CSA has received letters from concerned members of the public. Some in their letters opined that everybody should be allowed to buy and sell binary options, but the trading should take place on the platforms of registered and accredited binary options brokers. Others said that an exemption should be made for professional investors, while some held the view that the regulator should up its watchdog activities rather than ban binary options outright.
 
On its part, the CSA responded that the Binary Options rule is a necessary step in the right direction in light of the growing cases of binary options related fraud. It maintains that the rule is part of a larger effort to curb the ugly menace and it has already produced favorable results. While the CSA regrets the potential loss of profit the 30-day expiry date test will cause for sophisticated investors, it views the rule as an adequate balance to make regulation of the industry better.
 
This article may also be interesting: Scottish Limited Partnerships (SLPs), fronting for binary options firms, escape from fines over non-compliance with rules.