Are Binary Options Legal in New Zealand?

Please Note: This article is out of date and the legal situation in New Zealand may have changed.  We hope to revisit and update this article shortly with more current information.

Binary options are a new and exciting way of making profitable investments at a lower risk level. Many large nations across the world, such as the United States, the United Kingdom, and Australia have seen an increase in investors wanting to partake in trading binary options, which has encouraged more brokerage firms to cater to a wide range of needs. Although New Zealand is a smaller nation, traders from the area are increasingly becoming aware of binary options and its advantages.

Before committing to any type of investment, educating yourself and learning the ins and outs of the industry is necessary to ensure long-term success. Since binary options have only started gaining in popularity in the late 2000s, the information is sometimes scarce in relation to the practice. Since binary options in New Zealand are just starting to get some attention, we have gathered all the information you need to know to set yourself on the right path.

Legality

The first element to consider when it comes to investing is whether there are any legal concerns. The governing financial authorities in New Zealand have already addressed the legal side of binary options in order to put consumers at ease. As such, it is legal to trade binary options within the country. In fact, the government perceives this new industry as not only viable but as an important component of the overall financial market health.

Regulations

New Zealand may be a smaller nation but its size has had no impact on how quickly the financial authorities within the country decided to evaluate the binary options sector in order to set clear regulations and guidelines for consumers and brokers alike. While many larger nations in the world remain without any specific regulations, the New Zealand government has chosen to be proactive and assist traders in creating additional wealth-building strategies with the aid of binary options.

The Financial Markets Authority (FMA) is the regulatory body overseeing binary options as well as many other financial transactions within the country.

Licensing 

The FMA works in according with the Financial Markets Conduct Act, which dictates that any binary option broker wishing to sign New Zealand traders on to their platform must be licensed. Brokers need to register under the derivatives category, which includes not only binary options but also various categories of futures and swaps. In a very smart move, the FMA has also kept the definition of derivatives broad enough that any new broker trying to operate in the country cannot escape having to register through the proper channels, regardless of the offer of service.

There are minimum standards which brokers must abide by in order to qualify for a license. For example, the business must be able to operate effectively, in accordance with any licensing conditions and the FMA must be absolutely certain that you are legitimate and do not pose a threat to the capital markets of the country or the consumers.

Once a brokerage firm obtains licensing, the work does not stop. There are a series of obligations, dictated by the FMA, that each organization must meet in order to retain a license of operation. Some of these obligations include complying with regulations in relation to managing clients’ funds, having up to date product disclosure statements, and a close monitoring of the firm’s compliance.

Overall, the FMA has tightened the requirements to obtain and maintain licensing for brokers. In an effort to prevent fraudulent brokers from establishing business in the country, and also in order to provide high quality investment opportunities for its consumers, industry watchdogs are keeping a close eye on brokerage activities.

Governing bodies

Financial Markets Authority

The Financial Markets Authority (FMA) was previously known as the Securities Commission. The latter was a Crown Entity of the government and was mainly in charge of regulating investments. In April 2010, it was announced that a new financial regulator would soon take over and it was in May 2011 that the government decided to replace the Commission with the FMA. It would ultimately take on a much broader role than its former organization.

The financial markets regulation structure of the country is often called ‘twin peaks’. The first peak is represented by the FMA, whereas the second one is the Reserve Bank of New Zealand who has all prudential power over the country’s banking sector.

The FMA is a government agency responsible for overseeing all financial regulations within a wide range of markets in New Zealand. It has a duty to protect its consumers’ rights and to not only regulate but also enforce all rules within the financial sphere.

Some guidelines have been determined in order to offer better structure for the industry. For any investor, responsibilities should be clear and understood upon entering financial markets. In addition, investors have a right to information access where they will feel confident in making proper decisions. The FMA underlines the importance for investors to feel confident in the regulations of the market where any potential risks are flagged and investigated appropriately.

The FMA regulates a number of sectors such as securities, exchanges, financial advisors, brokers, issuers, and trustees. Transparency and fairness are key elements within the FMA’s strategy since without them, the capital markets would struggle to grow and remain competitive with other global markets. The organization clearly understands that efficient capital markets lead to economic prosperity, job creation, and building of wealth. It strives to provide consumers with opportunities to build diverse portfolios, and in recent years, binary options have taken a front row seat due to their ease of trade for beginners.

While the FMA has only been in operation for the past few years, experts have already noticed significant benefits to the hard work it has been doing. Some of the impacts have been felt in regards to levels of compliance; both market participants and frontline regulators maintain good practices. The resources available to consumers are growing and contributing to investors having a better awareness of investments. Having the proper tools allows traders to make informed decisions.

Financial Service Providers

The Financial Service Providers Act was passed into law in September 2008. In August 2010, the Financial Service Provider Register (FSPR) started accepting applications for registration but it waited until December of the same year to make it mandatory for any broker or organization wanting to legally provide financial services to have to sign up.

The purpose of the FSPR is clear: it is to maintain a register of all financial service providers in the country to increase transparency of information. In creating this organization, the government has made it more streamline for brokers and other financial providers to obtain registration and licensing in one place.

The eligibility criteria have been kept broad to encompass all service providers. In fact, all a business needs to register is to have an address of business in New Zealand, and to be in the business of providing financial products. Another layer of protection has also been added by requiring all organizations to pass a criminal record check.

Broker selection

Since binary options are just starting to make waves in New Zealand, there are still very few brokers operating from within the country. If traders are interested in keeping their investment funds in the nation, the choice of brokers tends to be limited. On the other hand, traders can be assured that the standards of practice are high and that the industry is closely monitored by financial authorities.

For traders wiling to expand their search, many offshore brokers cater to New Zealanders. The concern with signing up with a foreign broker is always its legitimacy. However, the best way to ensure a broker is operating a fair and safe business is to inquire about registration from a foreign financial authority. Many offshore brokers have licenses from the United Kingdom, the European Union, or Cyprus. All are valid and have similar regulations to the FMA.

Assets 

Similar to many other countries where binary options are regulated (at the exception of the United States), all four categories of assets are tradable. Traders have access to stocks, currencies, indices, and commodities.

Stocks

Stocks are listed on a variety of exchanges. Binary options related stocks can be found mainly in the United States, Europe, Asia, or the Middle East. Each broker may offer a different set of stocks. If you are particular about which stocks you want to trade, it is recommended to check with the broker before signing up to ensure you will have access to the ones you want to work with.

Trading stocks on binary options may be tricky for novices. It is always recommended to trade stocks you are familiar with, which often means trading ones that are inherent to your country.

Currencies

Trading currencies on binary options is generally perceived to be less complex than stocks. Since the most popular currencies tend to be traded among a majority of investors all over the world, it is easier to have access to the right information you will need to make smart decisions.

Indices

Almost all binary options platforms will offer listings on the US exchanges since these are what most foreign brokers use. As such, traders generally always have access to the Dow, the S&P500, and NASDAQ. Other exchanges may also be available depending on your broker of choice.

Commodities

Commodities hold great importance in the overall economy, regardless of where you are from. Gold, oil, and silver are a few of the most popular ones that are offered on most trading platforms.

As a trader in New Zealand, you must keep in mind how the local economy is heavily influenced by the changes and fluctuations within the agricultural, tourism, and film industries. Due to its small size, even a minor change can have a significant impact on the stability of the economy or anyone of these industries. Trade wisely and always stay current with the information pertaining to the assets you decide to trade.

Best practices for trading binary options

Many traders agree that trading binary options is one of the best ways a novice can get involved into financial markets. It presents many benefits to beginners or advanced traders, and the possibilities for profit-making strategies are endless.

With any type of investment, you can increase the likeliness of a positive experience by respecting a few guidelines. Binary options are no exception, and as such, here are four key things to remember when trading:

1. Choose a broker who offers a great platform with high payout ratio

Just as you would go to different dealers when shopping for a car, you should evaluate a few brokers before making a choice. Platforms differ greatly so you want to find one that will be appealing to you and easy to use. In addition, since your goal is to generate profits, look for a broker that offers a high payout ratio but with minimal fees and restrictions.

2. Stay within budget

It is too easy to get caught up in the moment or on a profit momentum and make bad trading decisions. Know your numbers ahead of time and stick to them. Try to establish a trading ratio in accordance with your budget (such as 20% of your account) and respect it. No trader is right 100% of the time so by following this method, you will not risk losing it all.

3. Keep your emotions out of your trades

Many people sometimes get a hunch of good luck or intuition that tells them a certain investment is the right move. If this happens to you, try to bring yourself back to what binary options are truly about, which is knowing your assets and having a strong understanding of how prices will fluctuate. Binary options are about strategies, not luck.

4. Stay informed

The more you know about the assets you trade, the better prepared you will be to make good decisions. You can set up Google alerts to promptly receive any information pertaining to your assets and you may choose to sign up for trade signals available on numerous websites.

Future of binary options

Given that New Zealand already has a strong regulatory structure in place for binary options, we may not see many changes in the future, aside from the updating of current regulations to adjust with the market’s evolution.

However, investors within the country are known to have an aggressive style of trading and seem to prefer trading currencies to other assets such as indices or stocks. New Zealand traders have a reputation for being extremely confident and not afraid of implementing high stakes strategies. Since these are two traits brokers love, we can expect that more binary options brokers will be created in the country as well as for offshore brokers to start targeting New Zealand traders more specifically.