Saturday, 21 October 2017
Branching out into binary options? You might have double trouble
Date : 09 August 2017
Author/s : Daniel Goldberg, Jamie Nettleton, Michelle Wibisono
Type : Focus Paper
 

 

If you are in the business of offering derivatives, you probably know that binary options are a form of derivative, and that you need a licence from the Australian Securities and Investments Commission (ASIC) to offer them in Australia.


But what if you run a gambling business and want to offer ‘non-financial’ binary options as betting products? You might find your business under double regulation. Read on to find out how this may come about and what you can do about it.


What are binary options?


Binary options are a relatively new type of product. They are viewed as highly speculative and risky – effectively no more than a bet or gamble. In the financial world, they are a type of option used to predict the short-term movements of an index, currency or asset price, such as the price of a share or commodity. Unlike traditional options, binary options often have very short expiry periods (even expiring in minutes or hours) and they do not give the holder the right or obligation to buy or sell the underlying asset on expiry.


Binary options are based on a “yes/no” proposition, for example: will a certain company’s shares be trading above $30 in an hour’s time? Assume the customer thinks the answer is “yes”, and therefore buys the binary option. (If the customer thinks “no”, he or she would sell the binary option.) At the end of the hour, when the binary option expires, if the share price is above $30, the customer has correctly predicted the price movement. The customer receives a fixed cash payout. This payment is usually a percentage of the cost of the option, together with the initial outlay, less fees associated with the option.  However, if the share price is $29, the customer has made the wrong prediction. The customer loses the entire amount paid for the option.


Hence the ‘binary’ name: there is either a correct prediction (leading to an earning of a fixed cash payout) or a wrong prediction (and loss of the amount invested).


How are binary options regulated by ASIC?


ASIC regulates financial products, and the financial services that relate to them, under the Corporations Act 2001 (Cth) (Corporations Act). The Corporations Act has a rigorous and complex financial services licensing regime which applies to financial services businesses.


Under the financial services licensing regime, any person who provides financial services, such as offering financial products, must hold an appropriate Australian financial services licence (AFSL) issued by ASIC. Alternatively, persons must be authorised by an existing licence holder who already holds an appropriate AFSL to provide the financial services, or be exempted from the licensing requirements.


The financial products caught by this regime include ‘derivatives’. ASIC considers that binary options (in the sense described above) are ‘derivatives’. A ‘derivative’ is an arrangement in relation to which the following are met:

 

(a)

a party to the arrangement must, or may be required to, provide a particular kind of consideration to someone else at some prescribed future time; and

(b)

the amount of the consideration (or value of the arrangement) is ultimately determined, derived from, or varies by reference to (wholly or in part) the value or amount of something else. This “something else” can be of any nature whatsoever and does not have to be deliverable, e.g. an asset, a rate, an index or a commodity.

 

ASIC has been surveilling binary option providers and has announced that, “Our future focus will be on whether binary option providers are appropriately licensed.” It has taken action to restrain unlicensed persons from offering binary options.  It has also been actively warning investors against buying binary options from unlicensed providers.  Recently, it has indicated that it would be targeting unlicensed providers of binary options through mobile apps.


What if you want to offer binary options based on ‘real life’ events?


Binary options are not necessarily limited to financial products and could be based on non-financial products. They could be used to bet on ‘real life’ events, like the results of a sporting match or an election result.


If you were to offer this type of binary option in Australia, you would expect to be regulated by gambling laws in the various Australian jurisdictions.  But the surprising news is that you might also be regulated under the financial services licensing regime mentioned above. This is because the definition of ‘derivatives’ is wide enough to include this type of binary option.


In other words, you could theoretically be regulated under both gambling law and the financial services licensing regime, so you might need both an appropriate gambling licence and an AFSL.


Do you need a gambling licence to offer binary options in Australia?


Ordinarily you would, but generally you don’t if you have an AFSL that permits you to offer binary options. This reflects a general legal principle in Australia that, provided you conduct the relevant activity under an appropriate AFSL granted under the Corporations Act, you do not need a gambling licence for the same activity.


However, while strictly you may not need a gambling licence, you might nevertheless consider seeking one if you wish to promote yourself as a service provider of the highest integrity.


Remember also that this principle does not apply in reverse: a gambling licence will not avoid the need to hold an AFSL to offer binary options.


What do you need to do before you offer binary options?


Your starting assumption should be that your offers of binary options would be regulated by ASIC under the financial services licensing regime. This means you would need to:

 

(a)

apply to ASIC for an appropriate AFSL that covers derivatives;

(b)

get authorisation from an existing AFSL holder who is appropriately licensed to offer binary options; or

(c)

ask ASIC for relief from the licensing requirements so as to allow you to offer binary options without an AFSL or authorisation.


We can help you navigate a situation where you potentially face double regulation. Speak to us to find what you need to do to comply with the Corporations Act, ASIC’s requirements and gambling laws if you plan to offer binary options.

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