From its inception, binary options trading has always been controversial, with each country focusing on different levels of regulation and licensure. Last November, the Japanese Financial Services Agency (FSA) imposed a ban on new binary brokers entering the market and announced that it would be revising the statute of binary options due to the FSA's concern that in some of its forms, binary options excessively resembles gambling.
In June 2013, two of the United States regulatory bodies, the Commodity Futures Trading Commission and the Securities and Exchange Commission, made their position clear on the subject of what they perceive as the perils of trading off-exchange binary options, a method of trading which is illegal in the United States. In doing so, these regulators warned investors about the potential risks of investing in binary options and has charged a Cyprus-based company with selling them illegally to U.S. investors.
Japan
Last month, Japan's Financial Futures Association (FFAJ) finalized the lengthy and comprehensive rulings by which binary options companies are to be governed, placing the onus on the technology providers which develop and supply trading platforms for the world's binary options brokerages.
At this summer's Forex Magnates Tokyo Summit, these technology providers unveiled their newly modified platforms which incorporate the features necessary to ensure compliance with the rulings. Japan's new regulations are essentially the first set of custom built regulatory rulings which have been designed from the ground up purely for the overseeing of binary options.
Forex Magnates also examined the rulings for the convenience of participants from outside the Japanese domestic market, covering several points including determination of the base hour for a trading period for all over-the-counter binary option transactions. After much discussion, the conclusion was that trading should not be shorter than the base hour.
Transparency
A weighty issue covered by the new rulings was transparency, a major concern among regulators worldwide. This includes the method by which prices are arrived at by brokers that offer over-the-counter binary options.
The ruling also addresses the issue of how brokers can present their case in the event of a complaint. This is one of the major reasons why the US National Futures Association permits binary options trading only on exchanges within its jurisdiction.
The FFAJ, however, permits companies to maintain an OTC model. On-exchange binary options are exempt from the rulings that only apply to OTC binary options.
Cash back campaigns
The FFAJ suggested that binary options companies take a cautious attitude towards advertising cash-back campaigns that could influence the judgment of investors. They consider the use of bonuses and cash back incentives as a less fitting way to attract customers than affiliate advertisement. The ruling mostly cautions companies from offering gifts. Regarding affiliate advertisement, the FFAJ obliges companies to carefully define the content of campaigns.
Client suitability
When it comes to client suitability, companies will now be required to classify the characteristics of customers and establish a trading limit for each type of financial instrument offered. Companies are required to check whether or not a customer is sufficiently knowledgeable by means of an examination which can be conducted by providing the client with a questionnaire where the choice of answers is true or false.
To guarantee effectiveness when designing these questionnaires, companies must avoid easy questions that provide hints to the answers. Questions must be of high quality and be able to measure the degree of understanding of the product being sold to each customer.
Payout
Based on the structure of price calculation for binary options, a firm is required to quote trade prices based on the payout amount. In order to maintain comparability of trade prices for customer under such conditions, currency units must be clearly stated so that a customer can easily compare one currency with another.