The EU regulator has gotten a bad rap as not having provided adequate oversight of its members. This is especially true since a flood of Binary Options Brokers has used the Cyprus regulator as their jurisdiction of choice.
Over the past year, many of these brokers have been sanctioned for numerous violations. These are usually related to failure to follow proper AML Anti-Money laundering procedures. Some firms were also cited for their trading practices which created unfair advantages to the broker. Some fines have been as high as 300,000 Euros.
Cyprus Regulator Reforms on the Way
In light of the many complaints received by CySEC, they have already announced reforms with Binary Options and price transparency. CySEC has also recently proposed new regulations regarding liquidity. These new proposals offer many good suggestions and should be looked at by other regulatory authorities. The CIF or regulated firm would need to disclose why they must hedge positions and what their requirements are. They must also disclose who the counter-parties are to their clients’ trades.
Knowing Your Counter Party a Must
One new proposal of note is that counterparties do not need to be EU regulated brokers but they should be a member of a regulatory jurisdiction. CIFs also need to do complete due diligence on their liquidity relationship. The proposal even specifies a less than 10% capital ratio with the LP. The Cyprus regulator is also encouraging that the CIF use more than one liquidity source. If only one LP is used the broker would need to ensure the financial health of that firm.
Common Sense Reforms
These reforms offer common sense solutions to the broker liquidity provider relationship. It should also solve the issue of systemic risk. Many Forex Regulators place the focus on the broker being regulated and have ignored the very important component of the counter-party.
Trading Forex and Derivatives carries a high level of risk, including the risk of losing substantially more than your initial investment. Also, you do not own or have any rights to the underlying assets. The effect of leverage is that both gains and losses are magnified. You should only trade if you can afford to carry these risks. Trading Derivatives may not be suitable for all investors, so please ensure that you fully understand the risks involved, and seek independent advice if necessary