New Zealand opens consultation on binary options licenses

Maria Nikolova

New Zealand’s FMA notes high volume of complaints about online FX and binary options over the last 18 months.

In mid-February this year, FinanceFeeds reported that New Zealand’s Financial Markets Authority (FMA) was monitoring binary options while taking its time to consider future action. Today, the regulator provided an update regarding this action – it is proposing binary options providers targeting New Zealand residents to be obliged to obtain licenses.

The proposals concerning binary options form part of a consultation on short duration derivatives.

Until recently, the regulator’s interpretation of the definition of “derivative” in section 8 of the FMC Act was that any derivative transaction that is settled within three working days (for FX agreements) or one working day (for all other cases) was not regulated. Hence, thus far, a derivative issuer license was not required for that activity.

However, due to concerns about the potential harm these products pose for investors, the FMA has changed its stance and now defends the view that businesses selling these products should be licensed.

The New Zealand regulator stresses that during the last 18 months, the volume of complaints about online FX and other short duration trading services like binary options has remained at about 40% of the total volume of complaints it has received. The FMA has also seen the increased emergence of online trading platforms, often based in overseas jurisdictions, targeting New Zealand investors with offers of short duration derivative products.

Due to these developing risks, the FMA is reviewing the definition of “derivative” in the FMC Act, looking at whether providers of these products must be licensed as derivatives issuers. The regulator is concerned that deliverable spot FX contracts might be caught by the definition of derivative.

As a result of the revised view, entities making regulated offers of short duration derivatives will need to get a derivatives issuer licence and comply with the relevant FMC Act obligations. Providers who already have a licence will have to review their existing PDS and business practices. Providers of such products will have to consider whether they need to register on the Financial Service Providers Register, or amend their registration.

The FMA will provide a grace period. It expects all currently unlicensed providers to apply for a licence by August 1, 2017. All providers must hold a licence and be fully compliant by December 1, 2017.

The consultation closes on April 28, 2017.

In Canada, the Investment Industry Association of Canada (IIAC) has proposed a similar approach to tackling binary options fraud. The Association is proposing to allow brokerage firms regulated by the Investment Industry Regulatory Organization of Canada (IIROC) to be registered to offer binary options to investors. The outcome of such measures is far from clear, given that it has not led to any apparent positive results in jurisdictions like France, where only regulated binary options brokers are allowed to target investors. The blacklist of unregulated binary options brokers there has grown exponentially over the past couple of years and fraud is still flourishing.

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