ASIC Pursued Justification for CFD Product Intervention

The regulator sought justification for the measures, but the results were not “statistically significant.”

With the Australian Securities and Investments Commission (ASIC) still yet to deliver its ruling on the fate of the retail derivatives industry, new information has come to light that the Aussie regulator sought justification to use its product intervention powers before they were granted.

As Finance Magnates reported, in April of this year, the Australian regulator was granted product intervention powers by the country’s parliament. With the measures, the regulator plans to reduce leverage for contracts-for-differences (CFDs) and outright ban binary options for retail investors.

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According to a report from The Australian, before a Regulatory Policy Committee meeting on the 5th of December 2018 – four months before ASIC’s new powers were granted, the regulator submitted a paper regarding “preparations for a production intervention powers consultation on CFDs and binary options.”

In an email, which was contained in a freedom of information request viewed by the news outlet, the regulator concluded that it should implement product intervention measures in the retail derivatives industry.

In order to support its conclusion, ASIC then attempted to find evidence. However, according to the email, the authority’s review didn’t give the Aussie watchdog the support it was looking for.

In an email to colleagues including executive director, markets, Greg Yanco, William He, ASIC’s senior specialist, market supervision, wrote: “We are currently expanding ESMA’s (the European Securities and Markets Authority) leverage cap analysis on Australian equities.

“Separately, our preliminary analysis of the provider level data from the metrics review indicated a vague positive correlation between leverage and percentage of clients that lose money.”

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But the result was “not statistically significant due to the small sample size,” He wrote.

“In addition, we are seeking literature and logical justification supporting the consideration of a PIP (product intervention power) re leverage and other interventions.”

Regulators obsession with client losses

ASIC has shown increased concern over client losses in Australia, and over in Europe, the European Securities and Markets Authority (ESMA) used client losses as one of its reasons for implementing its own product intervention measures.

However, as Finance Magnates reported, the interesting thing about this regulatory obsession is that client losses have always existed. Even prior to internet trading, clients that placed their orders over the phone would still lose about 80 percent of the time. Given that’s the case, it’s slightly irritating that regulators are only now starting to say that the 80:20 ratio is problematic.

ASIC to announce measures in November

In September, ASIC released its consultation paper on its proposed product intervention measures. Unlike ESMA, ASIC said that it would not distinguish between major and minor currency pairs. Instead, the watchdog proposes 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.

However, according to sources speaking to The Australian, the introduction of the measures, which were expected to be announced this month, has been delayed until November. This is because the watchdog received a large number of submissions to its consultation paper.

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