Binary option is often described as a type of option where the payoff can only have two possible outcomes: either some fixed monetary amount or nothing at all. Please note that ordinary financial options usually have a continuous spectrum of payoff. There are two main types of binary options: the cash-or-nothing binary option and the asset-or-nothing binary option. The cash-or-nothing binary option pays some fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security. In Lithuania a binary option trading firm is a legal person whose regular business is provision of one or more investment services to third parties and/or the performance of one or more types of investment activities related to trading binary options on a professional basis. Below you will find the requirements for establishment of binary option trading firms.
Binary options licence types
All the legal persons which are planning to engage in trading binary options in Lithuania, shall obtain a licence which is issued by the Central Bank of the Republic of Lithuania.
Three types of licenses are available according to the Licensing rules: A, B and C. All of the three licences are different in the scope of services their holders can provide.
Type A license covers the widest range of services: reception and transmission of orders; execution of orders on behalf of clients; dealing on own account; management of a financial instrument portfolio; provision of investment advice; underwriting and/or placing of financial instruments on a firm commitment basis; placing of financial instruments without a firm commitment basis; operation of a multilateral trading facility.
Type B licence covers the following services: reception and transmission of orders; execution of orders on behalf of clients; management of a financial instrument portfolio; provision of investment advice; placing of financial instruments without a firm commitment basis;
Type C licence covers the following services: reception and transmission of orders; provision of investment advice; placing of financial instruments without a firm commitment basis. Type C licence holders can manage of a financial instrument portfolio by passing on execution of orders, safekeeping, accounting and management of financial instruments to another brokerage firm.
A brokerage firm can apply for all the activities which cover a certain licence or a part of the activities.
Share capital requirements
In order to obtain a licence, a firm shall comply with share capital requirements. Minimum share capital in order to acquire a type A licence is 730 000 EUR, type B licence – 125 000 EUR, type C licence – 50 000 EUR.
There are additional requirements to maintain certain share capital throughout the activities of the binary option trading firm in order to reduce risks. In addition, each binary option trading firm shall prepare a capital adequacy assessment report.
Board members of a binary option trading firm shall have a good reputation and no pending punishments or offences. The members shall provide access for the Bank of Lithuania to verify their personal data.
A legal person which applies for a licence shall submit the following documents to the Central Bank of the Republic of Lithuania:
- Business plan;
- Information about the legal person (including Commercial Register extracts);
- Information about shareholders;
- Information about the manager of the legal person;
- Documents confirming that share capital has been paid as well as capital adequacy assessment report;
- Information about close relations with other natural and legal persons in the Republic of Lithuania;
- Information about close relations with other natural and legal persons in third countries;
- Description of the office and equipment;
- Documents confirming commitment to become a member of recognized investors’ insurance system;
- Information regarding financial brokers to be employed;
- Documents confirming payment of state fees;
- Documents and information confirming compliance with requirements for brokerage firms;
- Information regarding implementation of money laundering and terrorist financing prevention measures;
- Information regarding ability to provide data about transactions using Transaction Reporting System;
- Information about IT systems.
The Central Bank of the Republic of Lithuania adopts the decision to issue a licence or reject the application within 6 months from the provision of all the above mentioned documents.
State fee for licence is 868 EUR.