By James Bibbings and Nicole Kuchera
On June 5, 2013, the Commodity Futures Trading Commission (CFTC) filed an action against the largest binary options trading firm in the U.S., Banc de Binary (BDB). The U.S. Securities and Exchange Commission (SEC) indicated that it intends to file suit against BDB shortly as well. In its complaint, the CFTC alleged that BDB illegally operated an online trading platform that allowed U.S. customers to trade binary options off-exchange from May 2011 to March 2013, in violation of the CFTC's ban on off-exchange options trading. The complaint also alleged that BDB operated as an unregistered futures commission merchant (FCM) from July 2011 to March 2013 and that it did not limit its customers to eligible contract participants, but rather conducted business with U.S. retail investors as well.
Nichole Kuchera is a lawyer with Henderson and Lyman
"In its complaint, the CFTC contends it has jurisdiction over binary options trading because binary options are effectively options on commodity contracts regulated by the CFTC."
In its motion to dismiss, which has yet to be decided by the court, BDB has responded that binary options are substantially different from options on a traditional futures position. For instance, in a binary options trade, the customer speculates on whether the price of a certain commodity will go up or down, whether a currency will increase or decrease over another currency, or various other market-related types of predictions. There is no options contract to buy or sell any underlying commodity, currency or other item, and there can be no delivery of the underlying item. Rather, a prediction is made as to the direction of a market move only, and the person who makes the prediction either wins or loses based solely on the market move. Until a resolution is reached by the court as to this key issue, regarding the breadth of the definition of an option, further discovery is unlikely to prove helpful in resolving this matter.
At the present time, only one firm, Nadex, has applied and succeeded in licensing itself to operate an exchange for binary options trading. BDB's attempts at registration as a binary options trading firm were unsuccessful, as have been similar attempts by other binary options trading firms. The uncertainty over regulation has left binary options firms wondering whether they can continue operating as usual, or whether they should try to register with the CFTC (or SEC) or conduct their binary options transactions over Nadex's exchange.
Regulatory agencies in other countries, such as the Cyprus Securities and Exchange Commission, have already begun to license binary options as financial instruments. The Malta Financial Services Authority is expected to follow suit shortly. U.S. binary options firms might begin to relocate to these countries, giving up their ability to solicit U.S. investors, due to the current uncertainty in U.S. law concerning the regulation of this type of financial services business.
We will seek to keep you informed of future updates. Please note that the information set forth in this summary is not intended to be all-inclusive and does not constitute legal advice. If you have any questions concerning the potential effects of the CFTC or potentially SEC action on your business, we recommend that you seek additional guidance. TTP has the business acumen, as well as relationships with law firms, such as Henderson & Lyman, to provide you with the guidance you need to analyze updates affecting the binary options industry.
__________________________________________________________________________________James Bibbings is the President and CEO of Turnkey Trading Partners (TTP), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (NFA) as a supervising auditor. During his time with NFA he was involved in approximately 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations. Since departing from NFA,Bibbings has owned and operated an independent introducing brokerage and participated in international forums on proposed CFTC regulatory requirements. He has also provided financial markets content for MSN, Yahoo, Financial Times, FinAlternatives, Wiki-Investments, Safe Haven, Financial Sense, The Wall Street Journal's Market Watch, Forex Journal, FX Street, Forex Factory, Commodity News Center and many other highly acclaimed investment publications. Two highly sought after informational pamphlets regarding futures and forex registration authored by Bibbings are currently available for free upon request through his company website. If you have any questionsor commentsfor Bibbings he can be reached directly by email at firstname.lastname@example.org and would love to hear from you.
Nicole Kuchera, JD, LL.M. is an attorney in Henderson & Lyman's Financial Services Practice Group. She concentrates her legal practice on futures, securities and derivativesindustry clients, such as commodity pool operators, commodity trading advisors, hedge funds, introducing brokers, proprietary trading firms, broker-dealers, investment advisers, swap dealers, futures commission merchants, forex dealer members and binary options trading firms. Ms. Kuchera counsels clients regardinga wide range of compliance and regulatory matters involving the rules and regulations of the CFTC and the SEC, as well as self-regulatory organizations and exchanges.Ms. Kuchera also represents clients in general corporate matters, such as business formation and structuring, licensing and registration, and preparation of disclosure documents, compliance procedures, business agreements and advertising materials. Shealso represents financial services clients in a wide range of litigation matters in various forums, including state and federal courts and in industry.