The High Price Brokers Pay for Regulation

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Once upon a time, there was a playground in which children played together without adult supervision. The playground was called the “financial trading market”. The kids played in two teams, the team of the traders and the team of the brokers. The kids from the two teams didn’t always get along, but if one hit the other, or took their toy away unless there was blood, nobody got involved, and things continued to be. As this playground began to grow, and more and more children began to play in it, the need for parents to be present became imperative. At one point, a security guard was hired, and when things got really out of control, there was even talk of closing down the playground.

In a tale of not too many fairies, we’ll tell you how the Forex and Binary Options markets are changing as they face stricter supervision from regulators, due to too many brokers taking one too many toys and poking one too many traders in what was for the longest time a free-for-all industry.

FX and binary options in the EU have seen an exponential growth rate and with passporting rights between member countries, it has for years been considered fertile grounds by brokers. CySEC, the Cyprus Securities and Exchange Commission, which is the regulatory body in charge of exercising supervision over financial trading firms established in Cyprus, was long known for its lax approach to regulation enforcement. Because obtaining regulation and maintaining a license in Cyprus was somewhat uncomplicated, brokers were fleeing to the island en masse and enjoying the benefits of doing business throughout Europe.  During the past few months, however, the panorama has drastically changed and the Cypriot regulator, in an effort to be regarded as a serious and reputable entity, has tightened the reigns on the industry establishing new regulatory guidelines and becoming stricter in the enforcement of the same.

Last year, CySEC began imposing fines over and entering into settlements with some of the largest financial trading firms in its jurisdiction, totaling no less than €1,000,000. These amounts are vastly greater than the rare €5000 fine operators were used to. In what has run of 2016, CySEC has settled with such firms as Banc de Binary for €350,000 and has imposed fines to firms as large as Rodeler Limited (24option.com) for €156,000.

What are some of the most recent changes in regulation?

Social trading: It has been well over a decade since the concept of social trading in which traders can follow the strategies of other traders in an automated way, was introduced, and although initially a mere Letter of Direction was required by regulators to prove that it wasn’t a money manager making decisions over a trader’s account, but rather a trader deciding in his/her own free will to copy another trader’s actions using copy trading technology, several regulators have changed the rules of the game in the past few years. Social trading, also known as mirror trading, is now considered a kind of portfolio management, thus making it a requirement of social trading platforms to establish measures to safeguard traders’ funds. The presence of a PM who monitors the activity of the social community is required from brokers, as is the ability to set stop losses, create diversity in the investment regarding followed masters, instruments and funds allocated to social trading versus traditional trading, and other risk management strategies.

Liquidity providers: CySEC has placed an added burden of responsibility for Cyprus Investment Firms, by requiring them to remain on top of the quality of execution of traders’ orders. The regulator has also established that liquidity providers be regulated in a country member of the EU, or else have a capital ratio of no less than 10%.

Call centers: It has long been the modus operandi of brokerages to be licensed within the European Union, while maintaining sales centers outside of it. In the latest consultation paper issued by CySEC, call centers will now be required to operate from within the borders of the EU, or hold an amount no less than €1,000,000 of their own funds as security. This places a huge burden over brokerages who will need to either incur in the expenses involved in moving their call centers and operating them at a much higher cost or keeping the exorbitant amount of money, unavailable to most small to medium size brokers.

As the industry continues to evolve and technology continues to advance, regulators find themselves in a never-ending game of catch-up in order to protect consumers from new methods and tools and brokerages find themselves in a never-ending game of adaptation in a view to cope with the changes imposed and find a balance between following the law and remaining competitive.

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About Author

Yael Warman is a creative writer with a strong background in marketing and advertising. Yael has been a writer for over 10 years and has worked for clients in various industries as well as her own companies and is currently the Content Manager at Leverate.

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