Are Binary Options Legal in South Africa?

Please Note: This article is out of date and the legal situation in South Africa may have changed.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

Trading binary options knows no boundaries. Wherever you live in the world, the basic requirements are as secure internet connection, some capital to start trading, and the drive and desire to learn about how the industry works.

In South Africa, traders are increasingly looking for ways to connect with the global commerce industry and trading is just as popular in this country as it is in other places across the world. There is a strong financial infrastructure in place that took years to establish, which now offers users of financial products security and peace of mind. The financial sector within South Africa is likely the most liberal and most advanced one of the entire continent, and as such, binary options are gaining in popularity among traders due to how easy they are to learn and trade.

When thinking of binary options, many questions such as the legality of this type of trade as well as regulation details come into play. For traders, it is normal and in fact beneficial to question these details in order to know exactly what you are getting into and how you can keep your personal information as well as your hard-earned money safe. Below you will find a detailed overview of all you need to know about trading binary options in South Africa.

Legality

Binary options are legal in South Africa. However, no financial authority is currently regulating brokers and the way they conduct business within the country. Despite the lack of regulations, this trading practice is regarded as highly ethical and completely legitimate as more traders are showing interest and setting a new precedent for the possibility of making quick profits and developing long-term strategies. Binary options are well established in the country after traders started getting involved back in December 2007, but the government or any other financial body has yet to look at setting standards and developing policies for brokers. This unfortunately leaves the door open for users to fall prey to fraudulent brokers and practices. However, the lack of regulation for online investing does not necessarily mean that trading options is unsafe; in fact, it is quite the opposite. There are many ways traders can ensure their safety and still fully participate in this exciting new type of investment.

While there are no binary options brokers operating from within the country capable of offering trading services to consumers, many others from various countries have access to the South African market. As long as they are registered with the appropriate authorities, traders can have confident in the services these firms offer.

Regulations

South Africa is home to the Financial Services Board, operating in accordance to the 2004 Securities Service Act. The FSB’s mandate is to oversee and regulate all non-bank-related financial activities and services within the country. The FSB also offers a complaint service for users to flag shady practices, unethical dealings, as well as potentially illegal services. The role of the FSB encompasses the supervision of many trading markets but does not yet include binary options. The organization can still be a valuable resource for binary options traders who may have general questions and concerns about investing money.

Until binary options become a regulated form of investment, many traders will continue to advocate the importance of regulation for not only the credibility, but also the long-term success of this industry within South Africa.

Some financial experts like to refer to binary options as a gambling method, but this is always dismissed very quickly by other financial key players within the field. Since making profits from binary options requires skills and has very little to do with chance, the practice does not meet the criteria for gambling. However, since the market is currently unregulated, this leaves potential for violations from unlicensed brokers, and this is why regulation of this form of investment is likely to become a priority for the FSB in the future. In other parts of the world where regulatory agencies oversee the trading of binary options, regulations are becoming stricter and are continually improved to provide consumers with the best experience possible. From a broker’s perspective, regulation is also crucial for the establishment of factors of credibility and professionalism.

South African consumers of financial products are attracted to binary options due to their ease of trade. Binary options do not require extensive knowledge to trade, although a deeper knowledge is generally required for the application of advanced trading strategies. Trading options also provides a lower risk and lessens the uncertainty often associated with conventional forms of investment.

Regulation of the industry is needed to offer standards of protection for South African investors and prevent unscrupulous brokers from exploiting a market with lack of regulations.

Licensing

As stated above, South Africa’s Financial Services Board does not currently offer licensing for brokers wishing to offer binary options trading to South Africans. As such, any broker claiming to be headquartered within the country is likely fraudulent. Instead, investors should strive to find brokers who have obtained proper licensing from other regulatory bodies such as CySEC (Cyprus Security and Exchange Commission) in Cyprus, or the FCA (Financial Conduct Authority) in the UK. Brokers registered and licensed by these agencies have to comply with strict guidelines. They are allowed to offer trading services to South African traders and are generally perceived as very reliable among investors.

Until South African authorities decide to regulate the online financial betting sector, traders will have to continue seeking trading accounts from offshore brokers. Although regulations from South Africa would technically offer the utmost security to traders, foreign brokers licensed in other jurisdictions are currently the best choice for South Africans.

Governing body

Financial Services Board (FSB)

The FSB is South Africa’s government financial regulatory agency responsible for overseeing operations from financial services unrelated to banking. An independent body, the FSB regulates the financial industry with the public’s interest at the heart of its policies. The FSB also regulates the biggest stock exchange of the continent, the Johannesburg Stock Exchange.

The agency was created in 1991 and over the years, many acts have been added to expand its role. Some of these acts include the Financial Intelligence Centre Act in 2001, and the Financial Advisory and Intermediary Services (FAIS) in 2004. Both of these acts now allow the FSB to inspect market conduct within the banking industry as well as work to fight money laundering.

The FSB’s primary goal is to promote and maintain a safe and credible investment environment within the country. The FSB supervises capital markets, financial services providers, insurers, credit agents, retirement funds, friendly societies, and more. There are three main components of the FSB: enforcement powers, complaints, and protection of investors’ rights. With regards to enforcement powers, the FSB is committed to deal with various types of breeches and has the authority to impose compensation orders, and other penalties. Its complaint department hears users’ complaints and attempts to resolve any outstanding issues. The FSB also operates an appeal board. Finally, with the goal of protecting fundamental investors’ rights, the FSB is part of the International Organization of Securities Commissions (IOSCO) and actively participates in regulatory meetings in Africa. In addition, the FSB works closely with the Securities of Non Banking Financial Authorities and the CISNA.

Broker selection 

Since investors have to sign up with offshore brokers to get involved in trading binary options, there are a few key elements to consider prior to making an informed decision. Many traders feel this step may be time consuming but if the goal is develop long-term trading strategies and achieve a rate of high returns, it is worth spending the time to meticulously dissect brokerage firms and carefully select the one that is right for your trading style and needs. When making your decision, you should look at the following five elements:

1 – Registration and licensing

This is the most important aspect of your search. Ensure that the broker is registered and licensed with the proper agencies. If you stumble across unregistered brokers or you cannot seem to find adequate and clear registration information, move on to the next one.

2 – Customer service

Since you will likely have to conduct business with a broker in a different time zone, you must ensure that you have access to timely and efficient service, should you require it. Many licensed brokers offer a 24-hour helpline, live chat services, and employ knowledgeable staff who can address your concerns efficiently.

3 – Diversity of trades available

As a beginner, you are likely to limit your trades to one or two types (e.g. one touch, ladder) but as you gain experience and want to expand on your potential to make larger profits, you will want to be signed up with a broker that offers a wide range of options. A quick search of the web will turn up the variety of trades available so you can cross check with your broker to see if they are available.

 4 – Platform

Each broker has its own trading platform. As a trader, you will want to dedicate your time to performing great trades so choosing a broker offering a user-friendly platform is a must. The platform should be intuitive and easy to navigate. Many brokers also offer platform compatibility with mobile phones; if you plan to trade options using your phone, check with your broker to ensure this is an option.

5 – Withdrawals

Brokers offer different payouts percentages. Verify the payout and withdrawal details of a broker before signing up. Choose one that offers high payout percentages with low withdrawal fees.

Assets

While most brokers offer all of the typical indices, commodities, and currency pairs, many South African investors can greatly benefit from trading on local indices (e.g. the ALSI) to trading assets such as the ZAR. The key to successful trades is to diversify your portfolio and only trade assets you know well and have the ability to monitor in terms of market fluctuations. New binary options traders should take things slow and trade a few assets to begin with; as you gain experience, you will have the confidence needed to develop trading strategies involving a range of assets.

Best practices for trading binary options

Binary options are not difficult to start trading but long-term success within the field requires a certain set of skills and deeper understanding of the industry. With any form of investment, two concepts should always be kept in consideration.

  1. Volatility

Any investment is subject to the volatility of the assets being traded and the financial markets overall. Binary options offer the advantage of quick trades so investors often find that the volatility factor is somewhat reduced; since you have a predetermined timeframe when entering a trade, it may sometimes be easier to predict the direction of the market and end up with an in the money trade. However, you should always consider volatility with each trade; you will likely have better judgment as a result and know when it is time to pass on a trade that may be too risky.

  1. Leverage

Derivative trading multiplies your gains potential but it also multiplies the risks. Leverage is a valuable tool with any investment but you have to be aware of your increased exposure to risk should your trade end out of the money. Monitor your leverage closely and learn when to pull back.

  1. Try before you buy

Many brokers have free demo accounts, which present a major advantage to traders wanting to learn about binary options trading. By signing up for a demo account, you will be able to test the field with dummy cash and see if you have enough skills to start investing some of your own capital. Trading with a demo account will also allow you to build the confidence you need to eventually perform your first real trade.

Future of binary options

With the increase of binary options traders in South Africa, the next step is for the FSB to start thinking about the regulation of online financial betting. It is only natural that this will come in the near future, as it is essential to protect consumers against fraudulent activities and to maintain the sound financial fabric of the capital markets within the country. Along with investors’ protection, the FSB would then be able to tax binary options brokers, which presents another major benefit.

Regulating binary options would increase consumers’ confidence in this form of investment and put South Africa on the map as a thriving binary options market.