Australia’s corporate regulator, ASIC, surprised the FX world early on Friday 23 October 2020, when it dropped its finalised product intervention order on the retail OTC derivatives industry.
The announcement ends over 12 months of uncertainty and speculation which started when ASIC released Consultation Paper 322 proposing to use its Product Intervention Powers in August 2019.
ASIC’s announcement was peculiar in its timing, released at 7.30 am Australian Eastern Standard Time. Hours later, the ASIC Chair and Deputy Chair stood aside pending an investigation into an expense scandal which is still spiralling the following week.
The intervention follows closely after one member of the Australian judiciary (Beach J) in his judgment against AGM, and a statement from ASIC Executive Director of Enforcement, Sharon Concisom advised that a decision is important for the protection of retail clients.
A view held by many in the business was that the intervention would be certain to occur but most likely to be imposed at a much later time. Proponents of this view believed that the impact of COVID-19 on treasury coffers
meant that the Australian government were not in a position to lose $400 million in direct tax revenue annually, lose billions in bank deposits which can be lent to small business in the Australian economy and have hundreds of people out of work in a once in a century economic crisis where unemployment is high and increasing.
The Instrument will come into effect from 29 March 2021, imposing leverage restrictions and negative balance protection, whilst standardising margin close-out arrangements and prohibiting inducements in the sale of CFDs.
Of interest, is the changes ASIC has made from its proposed intervention in CP 322 and the released intervention.
Additionally, four conditions that were originally proposed have been scrapped without much explanation from ASIC other than the reduction of ‘significant costs’. These were all related to disclosure.
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Condition 5 had prescribed that CFD issuers provide a prominent risk warning to retail clients which discloses the percentage of the CFD issuer’s retail clients’ CFD trading accounts that made a loss over a 12-month
period. ASIC’s accompanying notice said that the industry broadly agreed with the recommendation even if they were unlikely to have any impact on consumer decision making. Our review of submissions highlighted that some respondents suggested that the risk warnings may perversely be used as advertising where loss ratios were superior to competitors. Regardless, European brokers have been operating with a version of this requirement for several years now, so it is unclear why it was abandoned by ASIC.
Conditions 6 and 7 were also omitted. The conditions which required real-time disclosure of total position size and overnight funding costs were most likely excluded as they required the CFD issuer to display the information on their proprietary trading platforms, prejudicing them as compared to the majority of brokers who use third-party MetaQuotes, c-Trader and IRESS platforms.
Additionally, excluded from the product intervention is condition 8 which mandated that CFD issuers maintain transparent pricing and execution (similar to Europe’s Best Execution requirements within RTS 27/28).
Best Execution requirements do have their benefits but there are many detractors of RTS 27/28 in the regulatory world with ESMA recently questioning its efficacy and whether the resources required are proportional to its benefit to consumers. Therefore, it is understandable to have seen ASIC drop this requirement given it tends to follow the European approach, rather than lead.
And, as we are all no doubt acutely aware by now, leverage limits have been amended from the original proposal. Under ASIC’s original proposal currency pairs CFDs and CFDs referencing stock market indices were not broken up into ‘major’ and ‘minor’, an approach taken by ESMA. In its first iteration, all currency pairs had a leverage cap of 20:1 imposed, while stock market indices underlying instruments were capped at leverage of 15:1. In the final Instrument, major currencies (AUD, GBP, CAD, EUR, JPY, CHF and USD) attract a significantly higher cap of 30:1 with other currencies capped at the previously proposed 20:1. CFDs referencing major stock indices (CAC 40, DAX, Dow Jones Industrial Average, EURO STOXX 50, FTSE 100, NASDAQ 100, NASDAQ Composite, Nikki, S&P 500 and ASX 200) have imposed leverage limits of 20:1. Minor stock indices CFDs will have leverage capped at 10:1.
Other leverage limits remained unchanged from those first proposed in August 2019. There are 20:1 for gold derivatives; 10:1 for CFDs referencing commodities other than gold; 2:1 for CFDs referencing crypto-assets; and 5:1 for CFDs referencing shares or other assets.
The next few months will see Australian brokers busy updating their operational and compliance processes. Just as well the Australian government has significantly limited the capacity for Australians to travel anywhere other than within their own state, as margin FX and CFD industry participants are now further chained to their desks.
Sophie Gerber is the co-CEO of TRAction Fintech, a regulatory technology firm providing compliance solutions for brokers, including Best Execution and Derivative Trade Reporting and principal of legal firm Sophie Grace, which provides legal and compliance advice to financial service firms, including FX and CFD brokers.