Analysis

Will COVID-19 Cause ASIC to Delay Leverage Restrictions?

Amid the chaos of the coronavirus pandemic, will the Aussie regulator delay its leverage restrictions?

The coronavirus pandemic has made many businesses and individuals change their priorities, with financial regulators among them. Amid the chaos, in Australia, market participants in the FX and CFD space are wondering if the crisis will lead to the Australian Securities and Investments Commission (ASIC) delaying leverage restrictions for retail trading.

In Australia, ASIC is planning on implementing leverage restrictions not dissimilar to those in place in Europe. Except, according to the regulator’s consultation paper, the leverage restrictions will be tougher than in the EU.

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Specifically, the Aussie watchdog proposed that it will not distinguish between major and minor currency pairs. Instead, ASIC proposed a single leverage ratio limit for all currency pairs 20:1. For equity indices, ASIC suggests a ratio of 15:1, commodities excluding gold 10:1, Gold 20:1, crypto-assets 2:1, and equities 5:1.

Finance Magnates has previously provided analysis on whether ASIC’s measures are in the best interest of Australia, with Pepperstone, an Australian FX broker, being particularly vocal about the fact that the restrictions proposed by the regulator will stifle innovation in Australia and make the country a less attractive destination for companies.

Will ASIC delay implementation of restrictions?

Now with the onset of COVID-19, will brokers within the retail FX and CFD space have more time to prepare for the measures? Is it possible that amidst the chaos and fallout that the pandemic has created, the authority might delay the implementation of leverage restrictions?

Sophie Gerber of Sophie Grace and TRAction Fintech
Sophie Gerber, a Director at Sophie Grace and TRAction Fintech

Sophie Gerber, principal of legal firm Sophie Grace and the co-CEO of TRAction Fintech, a company that focuses on providing trade and transaction regulatory reporting services for financial products, including OTC FX and Derivatives, said that ASIC had not changed its mind on implementing the restrictions.

“I understand that ASIC’s views on the issue of CFD leverage restrictions has not changed and they are seeking to pursue the enforcement and regulatory agenda they had in place prior to COVID-19 becoming an issue in Australia.  A number of brokers have been asked to voluntarily provide data to ASIC on a regular basis regarding their client profitability statistics,” she said. 

So when can we expect the regulations to come into effect? According to Gerber, there are two ways to think – optimistically and pessimistically.

“I would be surprised if the product intervention order was released prior to more of the COVID-19 restrictions being lifted, however it is not outside the realm of possibility,” Gerber explained. 

“An optimist would say that the order won’t be released until the economy has recovered and can withstand the losses that will be sustained to the Australian tax base from losing many of Australia’s largest brokers that make a substantial contribution, including to employment.  A pragmatist or a pessimist may say that regulators have no real concern for such things.”

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Client losses

As Finance Magnates has previously analyzed, client losses have been used by financial regulators to justify restrictive product intervention measures. It was the main support for the European Securities and Markets Authority (ESMA) and now ASIC.

Namely, in recent years regulators have started to say that the 80:20 ratio is problematic, where 80 represents a percentage of loss. However, it is worth pointing out that client losses have always hovered around the 80 percent mark.

In recent weeks, Finance Magnates has been speaking to a couple of people working at retail brokers, who revealed that retail traders posted bigger losses in March, on the back of COVID-19 volatility.

Nonetheless, April has seen significant growth in new account openings and trading activity. In addition, despite oil prices plunging into negative territory for the first time in history, retail traders continued to want exposure to oil contracts and take long positions. 

Among this influx of new account openings, are new traders, being driven to FX and other asset trading because of the extra attention being given to the markets, as volatility causes wild moves. Therefore, it could be argued that we have more people trying to trade FX without really understanding the asset.

Natallia Hunik of Advanced Markets
Natallia Hunik, Chief Revenue Officer at Advanced Markets Group
Source: LinkedIn

Earlier this week in a webinar hosted by Finance Magnates, the Virtual Leaders Roundtable, Natallia Hunik, Chief Revenue Officer, Advanced Markets explained how retail traders were flocking to oil, and taking out long positions, despite prices going into negative territory.

“I think a lot of newbies, especially retail users are not understanding the implications… I think in terms of protecting the retail users I think definitely there needs to be more education, trying to communicate with them,” Hunik outlined.

Do retail traders need to be protected now more than ever?

This raises the question – do retail traders need to be protected now more than ever? And could this prompt ASIC to implement the measures despite the fact that it could damage the Australian economy further?

“There have been huge losses sustained by retail clients across the financial product landscape in the past few months,” Gerber highlighted. “This includes to the stock market broadly and to blue chip stocks which are cutting their dividend (negatively impacting many retirees reliant on this income stream) and the bond market (Virgin bondholders have been very vocal in the mainstream press).”

“Whether these losses are greater or more significant or have caused more consumer detriment to retail clients than the losses sustained by CFD and margin FX traders is something which will no doubt be a point of contention once any product intervention order is released.”

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