Despite industry opposition, Canada announces ban on binary options

More than five months have passed since the Canadian Securities Administrators (CSA), an organization which has amid its members the securities regulators from 10 Canadian provinces and 3 territories, published a proposal to prohibit binary options. Today, the CSA moved ahead with the implementation of the proposed regulatory mechanism.

Under the proposed instrument 91-102, the ban covers all sorts of “binary options”. It will apply to binary options, regardless of the specific name. This means that the prohibition will cover (list is not exhaustive) “all-or-nothing options”, “asset-or-nothing options”, “bet options”, “cash-or-nothing options”, “digital options”, “fixed-return options” and “one-touch options”.

The Proposed Instrument prohibits advertising, offering, selling or otherwise trading a binary option with or to an individual.

It is not yet clear whether the regulators have succumbed to the industry pressure and have amended some of the aspects of the proposal, especially with regard to allowing binary options to be offered by IIROC-regulated firms. Today’s announcement by CSA says that the new rules make it illegal to advertise, offer, sell or otherwise trade binary options shorter than 30 days with any individual.

There has been some critical feedback as to the proposal. The Investment Industry Association of Canada (IIAC), which represents 130 Dealer Member firms regulated by the Investment Industry Regulatory Organization of Canada (IIROC), has insisted that the ban must apply only to illegal binary options trading offered by unregulated binary options firms. According to the IIAC, its members should be allowed to offer binary options to retail investors.

There have also been calls to allow trading binary options on-exchange, as this is allowed in the United States.

On the other side of the spectrum of opinions is the feedback by organizations like the Canadian Advocacy Council for Canadian CFA Institute Societies (the CAC), which has backed the binary options ban proposal and even went beyond it by questioning the status of OTC Forex.

The CAC has noted that binary options are commonly used as vehicles to commit fraud against individuals, often with no possibility of recovering the funds. More interestingly, the CAC stresses it is important that the CSA takes this measure in furtherance of the goal to prevent fraud and support better investor protection in the capital markets. The organization queries whether the sale of other such financial instruments to retail investors should also be restricted.

“In particular, instruments such as leveraged foreign exchange over-the-counter products may give rise to the same concerns expressed in the Binary Option Prohibition and consequently we query whether they ought to fall within the ambit of this proposal”, the CAC says.