Organising your company to offer Binary Options

Marios Cosma, Partner, K. Treppides & Co Ltd 10 July 2012

Matters to be covered
What is Binary Option? Which CIFs can offer binary options? What is the difference of market maker and a broker? What are the types of brokers that a CIF can apply? Can a CIF offer FX and Binary Options? Offering Binary Options now. What are the Options available for your business post regulation date? What is the room of expanding your business in the future? Can a company offer Binary Options if it is not licensed?

Binary Options
What is a Binary Option License? A Binary Option is nothing more than a financial instrument/product (as are CFDs, forward contracts etc). It is not a separate license. The license needed to offer Binary Option Trading is in essence the same as for Forex services.

Binary Options
Binary Options are also called: All or nothing options Digital options (more common in forex/interest rate markets) Fixed Return Options

Binary Options

Question

Are binary options regulated by CySEC?

Answer

CySEC has decided to include the trading in Binary Options within the scope of the Investment Services and Related Activities Law (the Law) and that they are considered as a financial instrument

Regulated Services and Financial Instruments

Investment Services
Reception and transmission of orders in relation to one or more financial instruments Execution of orders on behalf of clients Dealing on own account Custodian services Granting loans/margins Foreign exchange services Stocks, options, futures, forwards and other derivatives (where the underlying asset is a stock, index, commodity, fx), CFDs

Ancillary Services

Financial instruments

Who can offer investment and ancillary services in Cyprus

Any legal entity established in Cyprus which has submitted an application to CySEC and obtained a CIF license. Any legal entity regulated in other EU countries that passports its services to Cyprus.

Who can offer Binary Options trading?

There are 4 Models that a business can use in order to set up so as to offer Binary Options:

Business Model #1 Business Model #2 Business Model #3 Business Model #4

Market Maker Broker to the Market Maker that can hold clients funds Broker to the Market Maker that cannot hold clients funds Tied Agent to the Market Maker/Broker

Initial capital requirement: definition

For a newly incorporated company, initial capital equals to the issued and paid share capital. For operating companies, initial capital equals to the issued and paid share capital plus returns (plus some other items). Initial capital must be maintained above the minimum (EUR1mil, EUR200k, EUR80) as applicable. The funds that will be injected into the company for the issue of share capital will be companys funds and can be used for companys operations. One month prior to the final approval, CySEC will request these funds to be blocked into a bank account in the Companys name. Following CySEC approval these funds can be used for companys operations. The Company is required to monitor its capital adequacy and large exposures on a continuing basis (daily) and make the reporting to the CySEC (monthly/quarterly).

Who can offer Binary Options trading?

CIF Market Maker CIF Market Maker

Broker CIF Tied Agent End users/ customers End users/ customers

Business Model#1: Market Maker Model#1

Who can act as market maker?
CIF Market Maker
The CIF acting as market maker is authorised to provide at least the following services:

Customers placing orders for binary options & depositing funds with the CIF

Reception and Transmission of orders in relation to one or more financial instruments; Execution of orders on behalf of clients; Dealing on own account; Custodian services; Granting Loans/Margins; Foreign Exchange.

Business Model#1: Market Maker Model#1

Initial capital requirement In accordance with paragraph 10(3) of the Law, the market maker shall have an initial capital of at least one million euro. The market maker shall operate an internet based trading system which will enable clients to trade in binary options at prices defined by the market maker itself. The market maker will act as the counterparty in clients transactions assuming the exposure to market risk. Clients can be other financial institutions or retail clients.

Technical Infrastructure

Exposure to market risk

Business Model#2&3: Broker / CIF Model#2

CIF Market Maker
Transmission of orders

The market maker may collaborate with brokers/CIFs in the following manner: 1. CIFs authorised to provide only the service of reception and transmission of clients orders. CIFs authorised to provide the services of reception and transmission of clients orders, and also to hold clients funds.

Broker CIF
2. Customers placing orders for binary options Customers placing orders for binary options & depositing funds with the CIF

Business Model#2&3: Broker / CIF Model#2

Services Safeguarding of clients funds Initial capital requirement Exposure to market risk Possession of domain
Reception and Transmission No EUR80.000 Reception and Transmission Yes EUR200.000

No (the market maker will be exposed to market risk) Yes (clients orders will be executed by the market maker) Yes (clients orders may be executed by the CIF but covered 100% by the market maker)

Business Model#4: Tied Agent Model#4

CIF Market Maker
Transmission of orders

Broker CIF

The market maker or broker CIF can appoint Tied Agents in order to provide the investment service of Reception and Transmission of clients orders on behalf of the market maker. The Tied Agent shall provide its services exclusively for the market maker/broker CIF. Under no circumstances the Tied Agent will be allowed to receive and/or safeguard clients funds.

Tied Agent Customers placing orders for binary options

Business Model#4: Tied Agent

Who can act as Tied Agent? Any legal person established in Cyprus having under its full employment a person registered in the public register authorised to provide the service of reception and transmission of clients orders. Relationship between the market maker and the Tied Agent The appointment of each Tied Agent is made exclusively for the specific market maker/broker. Services provided by the Tied Agent Reception and transmission of clients orders Promotion of Companys services Attraction of clients for marketing purposes

Can a Company offer Binary Options if it is not licensed?

A company that is not licensed can offer Binary Options if it is acting as a Business Introducer (BI) to the Market Maker. A company that is not licensed or is not acting as a BI cannot offer Binary Options through a Cyprus Company.

Business Introducer
CIF Market Maker
Contractual agreement btn MM and BI

Referring clients

The market maker may collaborate with Business Introducer(s) who will provide marketing services and introduce clients to the market maker. The BI Agreement shall provide that under no circumstances the BI might act as a tied agent or broker of the market maker/broker CIF.

BI

Business Introducer
Who can act as BI? Any natural or legal person Existing White Labels of the market maker Relationship between the market maker and the BI BI is a marketing service provider of the market maker The contractual relationship is determined by the BI Agreement Services provided by the BI Marketing and advertising services for soliciting clients Restricted to introduction of clients and not to the reception and transmission of their orders or to portfolio management services

Comparison of licenses (for binary options and for forex) forex)

Investment Services needed to offer:
BINARY OPTIONS Reception & transmission FOREX Reception & transmission

Execution of orders on behalf Execution of orders on behalf of clients of clients Dealing on own account (if to Dealing on own account (if to be market maker) be market maker)

Comparison of licenses (for binary options and for forex) forex)

Ancillary Services (non core) needed to offer:
BINARY OPTIONS Safekeeping and administration of clients funds (not obligatory) Granting of credits or loans to an investor the so called margins (not obligatory) Foreign exchange services FOREX Safekeeping and administration of clients funds (not obligatory) Granting of credits or loans to an investor the so called margins (not obligatory) Foreign exchange services

Organisational structure of a CIF

Board of Directors Two Executive Directors Internal Auditor* Two Non-Executive Directors External Auditor Compliance Officer* OUTSOURCED Risk Manager*

Money Laundering Compliance Officer*

CEO

(4-rgrgrgrg

Dealing Room (R&T and Execution Department)

Dealing on Own Account Department

CFO Finance and Accounting Department

Back Office / Operations Department

Marketing

**

IT Department

**

* Can be outsourced to a service provider in Cyprus ** Can be outsourced to a service provider in Cyprus or abroad

Organisational structure of a CIF

Board of directors (majority of the BOD needs to be based in Cyprus) Two executive directors Knowledge and previous working experience (more than 4 years) Have to be approved by CySEC Full time employees of the company Two non executive directors Knowledge and previous working experience (more than 4 years) Have to be approved by CySEC Do not need to be full time employees of the company Must be independent CEO Based in Cyprus Knowledge and previous working experience (more than 4 years) Have to be approved by CySEC Can be one of the executive directors

Organisational structure of a CIF

CFO Based in Cyprus or abroad if the CIF belongs into a group of companies Knowledge and previous working experience (3-4 years) Can be one of the executive directors Instead of CFO the head of Finance and Accounting can be appointed Based in Cyprus Knowledge and previous working experience (2-3 years) Holder of a CPC Head of R&T and Execution if the CIF is a market maker Head of R&T only if the CIF is not a market maker Based in Cyprus Knowledge and previous working experience (2-3 years) Holder of a CPC

Head of dealing room

Head of dealing on own account

Organisational structure of a CIF

Head of Back Office Based in Cyprus / Operations Knowledge and previous working experience (1-2 years) Department No minimum qualifications Marketing

Can be outsourced to Cyprus or abroad Outsourcing agreement to be submitted to CySEC Can be outsourced to Cyprus or abroad Outsourcing agreement to be submitted to CySEC

IT

Internal auditor Based in Cyprus Compliance officer Can be outsourced to service providers in Cyprus Risk Manager Knowledge and previous experience is required MLCO

Organisational requirements
An office has to be established, properly staffed and equipped in Cyprus. Minimum number of personnel (at initial stages): 4-6 individuals based on the services that are provided. Operations have to be performed from Cyprus.

CIFS head office

HEAD OFFICE
Must be in Republic All CIF Staff shall exercise their duties form CIF Head Office, unless CIF operates a branch Fully Staffed

CIF registration fees and costs

Fees (EUR) EUR80.000 License EUR200.000 License EUR1.000.000 License
EUR7.500 Filling Application Fees to CySEC Annual CySEC Fees EUR5.000 EUR5.500

to A CIF shall pay annual fees which shall be the sum of the following: 1. A fixed charge of EUR3.000 plus 2. Accumulated increment according to the product of the turnover of the CIF as follows: a. 0,5% for a turnover between EUR500.001 and EUR1.000.000 b. 0,125% for a turnover between EUR1.000.001 and EUR5.000.000 c. 0,075% for a turnover between EUR5.000.001 and EUR10.000.000 d. 0,050% for a turnover exceeding EUR10.000.001 The maximum fee shall be EUR50.000

CIF registration fees and costs

Fees (EUR)
Internal Audit Services Compliance Officer Services External Audit

EUR80.000 License EUR200.000 License

EUR1.000.000 License

Minimum annual fee of EURO5.000 plus VAT depending on the activities of the Company Minimum annual fee of EURO4.000 plus VAT depending on the activities of the Company plus fee per task undertaken if not included in the above Minimum annual fee of EURO7.000 depending of the activities and risk adherent to the operations of the Company Annual fee of EURO5.000 EURO10.000 per director, depending on the experience and background of the director

Non Executive Directors Fees (2 non executive directors have to be appointed)

CIF registration fees and costs

Fees (EUR)
Office Rent

EUR80.000 License EUR200.000 License

EUR1.000.000 License

Usually an office space between 100-150m2 is sufficient however this depend on the people to be employed in Cyprus Executive directors / CEO EURO65.000 per annum * CFO EURO45.000 per annum* Back Office personnel EURO19.500-22.100 per annum Accountant (not CFO) EURO22.100-24.700 per annum Head of Departments EURO52.000-78.000 per annum* These may be relocated from other country to Cyprus. If such a person exists within the group such cost is a sunk cost.

Salaries (minimum estimation)

Reporting obligations of CIFs

REPORTING OBLIGATION CIF: Capital Adequacy and Large exposures reporting FREQUENCY OF REPORTING Monthly, quarterly or annually (in accordance with investment services CIF is authorised to provide Annually Annually On occurrence

Annual fees Clients funds and financial instruments Other reporting for which approval is required

Reporting obligations of CIFs

REPORTING OBLIGATION Internal Auditor Internal Audit Report Compliance Officer Compliance Report Money Laundering Compliance Officer Monthly prevention statement (regarding transactions in cash) Monthly Annually Annually FREQUENCY OF REPORTING

Money Laundering Compliance Officer Annually Report External Auditor Financial Statements Auditors report on financial instruments and funds held by the CIF Annually Annually

How can a business expand in the future?

Once authorisation is granted from the CySEC, it is possible to extend the license in order to offer additional investment services. For example a broker CIF can extend its license to become a market maker or to offer other services such as foreign exchange services. A CIF offering binary options can also offer Forex services without amending the license (and vice-versa). A CIF can be used as a springboard for access and easy setting up in prestigious EU financial markets (Single EU Passport), either through the establishment of a Branch or tied agents.

QUESTIONS?

THANK YOU!