Binary Options and Forex

Binary Options

On the 17 July 2013 the Malta Financial Services Authority (‘MFSA’) confirmed that Binary Options are considered to be instruments falling within the ambit of the Second Schedule of the Investment Services Act (Chapter 370 of the Laws of Malta). This came as a result of a clarification given by the European Commission of the relevant issues in terms of the Markets in Financial Instruments Directive, 2004/39/EC (MiFiD) in which the Commission determined that binary options fall within the scope of the Directive. Binary options can be defined as being an option in which the payoff is all or nothing, depending on whether a predetermined condition is fulfilled when the option expires. A binary option reflects a specific speculation in the financial markets that may happen during a specific time frame. When the binary option expires, the option holder will receive either a pre-determined amount of cash or nothing at all.

Prior to the 17 July 2013, binary options in Malta were regarded as being a gaming product and were regulated by Malta’s Lottery and Gaming Authority. The situation today is that a person who is interested in carrying out any investment service in relation to binary options in Malta must hold a license in terms of the Investment Services Act. The main advantage of the current position is that being a regulated product a licencee for binary options in Malta is able to passport his licence to any Member State simply by notifying the Malta Financial Services Authority.

Forex (Foreign Exchange)

Foreign exchange trading, commonly referred to as forex trading, is the trading of one currency for another at determined exchange price on the over-the-counter (OTC) market. It is a common occurrence that countries’ currencies appreciate and depreciate in value when compared between in each due to a number of factors, including amongst others economic reasons and natural disasters. It is precisely this fluctuation in value of one currency against another coupled with speculation on the price which attracts forex traders.

The Regulation of Forex in Malta

The Malta Financial Services Authority (‘MFSA’) is the local authority responsible for the regulation, licensing and supervision of all investment services falling under the Investment Services Act. The Investment Services Act (Chapter 370 of the Laws of Malta) defines an ‘investment service’ as being ‘any service falling within the First Schedule when provided in relation to an instrument’. Thus, when a service listed in the First Schedule of the Act is provided with an instrument, listed in the Second Schedule which is considered as being an investment service.

Online Forex

Online forex trading is generally performed in one of two forms; either by dealing on own account or by acting as a riskless principal. These forms of online forex trading fall under different category licenses as established by the Investment Services Act. The main difference between the two is in the capital requirement. If a forex is acting as a riskless principal, a category 2 license must be obtained from the MFSA. Under this category, a licence holder is authorised to provide any investment service, and to hold or control clients’ money or customers’ assets, but not to operate a Multilateral Trading Facility or deal for their own account or underwrite or place instruments on a firm commitment basis. The requirement to obtain a category 2 license is that a minimum capital of €125,000 is required. Furthermore, the forex must have its own funds which are higher than either (i) the initial capital, or (ii) the sum of all the risk components calculated in terms of the rules but excluding the operational risk component or (iii) the fixed overheads required. On the other hand, if a forex is dealing on own account, a category 3 license is required and an initial capital of €730,000 is needed. A forex applying for this license should have its own funds which are higher than either (i) the initial capital; or (ii) the sum of all the risk components calculated in terms of the rules including the operational risk component.

Gonzi & Associates, Advocates has over ten years experience in the setting up of investment service licenses including forex. If you wish to further information as to how we can assist you with getting a Malta licence to provide forex which licence can be passported to any EU Member State please contact one of our specialists.

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Forex and Binary Options

Key Experts

David Gonzi
David Gonzi
Managing Partner
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Augusto Quintano
Augusto Quintano
Lawyer
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