The Australian Securities and Investments Commission (ASIC) has officially announced restrictions on selling contracts for difference (CFDs) to retail clients, saying it was still concerned about investor protection.
The rules also mandate negative account protection, ensuring that customers cannot lose more than their trading stake, avoiding a repeat of the debacle following the 2015 Swiss Franc collapse. Finally, the rules forbid bonuses and other incentives, whether monetary or non-monetary, that may have encouraged overtrading in recent years.
For brokers, the biggest blow has been ASIC’s decision to limit how much leverage they can offer to their clients to juice up bets. Regulated firms have been forced to limit the leverage they offer to a maximum of 30:1.
Specifically, the decision includes the following leverage limits, which vary according to the volatility of each asset class:
- 30:1 for major currency pairs;
- 20:1 for non-major currency pairs, gold, and major indices;
- 10:1 for commodities other than gold and non-major equity indices;
- 5:1 for individual equities and other reference values; or
- 2:1 for cryptocurrencies.
Last year, the ASIC released its report regarding the new product intervention measures coming down hard on binary options and CFDs.
The power, which was legislated in April last year, allows ASIC to intervene when it deems that a financial or credit product will cause significant consumer harm.
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Specifically, the Australian regulator has proposed to ban binary options completely in the country and to put in place leverage restrictions for CFD products.
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The new rules effectively harmonize ASIC’s requirements with product approval requirements introduced in Europe by ESMA, which also banned offering binary options and restricted leverage on CFDs.
But, unlike ESMA, ASIC said it will not require issuer-specific risk warnings or other disclosure-based conditions as originally proposed. In Europe, the CFDs restrictions impose a standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.
The Australian financial watchdog has kicked off its largest swipe against the sale of risky investments to retail investors, but industry players are claiming that they already operate in compliance with most of these restrictions.
The corporate regulator has been preparing to flex its new regulatory muscles after a recent review found in 2018 alone, 80 percent of binary traders and 72 percent of clients who traded CFDs, lost money. Retail traders lost nearly $490 million and $1.5 billion a year in trading binary options and CFDs, respectively, according to ASIC data.
Still, the regulatory updates, which includes leverage limits, margin closeout rules, and negative balance protection, are anticipated to affect fortunes of local brokers from their Australian customers.