The Australian government has pushed forward legislation for the retail over-the-counter (OTC) foreign exchange (FX) and CFDs sector, solidifying rules surrounding client money and the segregation of funds, according to a regulatory filing.
Back in November 2016, the Australian government showed signs of proceeding with reforms to the retail over-the-counter foreign exchange and CFDs sector, ultimately reshaping the local industry. The impetus behind the directive was a loophole that existed, allowing brokers to utilize client funds in a non-fully segregated fashion.
The Australia Securities and Investment Commission (ASIC) previously outlined the risks and the need to change these segregation rules, warning that the use of client funds for additional purposes such as working capital and marketing agendas could place retail derivative client money at greater risk of loss, particularly in the event of insolvency.
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The latest reforms by the government were ultimately designed to protect clients – while a shift in legislation could cause operational difficulties for a number of companies in the country, the government is providing a one year transition period to help streamline the process.
More specifically, companies that are holding a regulatory license from the Australian Securities and Investments Commission (ASIC) will no longer be able to use client money “for a wide range of purposes, including for working capital”. This builds on existing legislation from the 2001 Corporations Act.
The legislation drew both support and condemnation, according to Matt Murphie, Director of the CFD and Margin FX Association, in a statement on the amendments: “The government is proposing to ban firms from using client money to hedge against risk, a technique applied by firms to protect a client’s portfolio and ensure client’s money remains safe.”
“We are extremely worried about the Federal Government’s drastic reforms because it will eliminate a large portion of industry players, not protect client money securely and will give mum and dad investors a false sense of security that the reforms have improved protection when statistics show the opposite,” he added.