Aussie Brokers Welcome ASIC Restrictions Despite Expected Volume Dip
- The new leverage levels will become effective on March 29, 2021.
The Australian Securities and Investments Commission (ASIC) is going to implement restrictions on the retail contract for difference (CFDs) market. Their impact on the trading market can be huge as the Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. Read this Term levels will be restricted up to 30:1 from the usual existing offerings of 400:1 on major currency pairs.
These restrictions can impact the existing trading market momentum but are deemed to be necessary. They are more in line with curbs imposed by the European regulator in mid-2018 on retail leverages and marketing.
Explaining the importance of the restrictions, OANDA Australia’s Managing Director, Anthony Griffin, pointed out the losses of the 'countless less-experienced traders', who often take high leverage positions without knowing the risk of liquidation if the prices go the other way.
“Many of these traders undoubtedly learned their lesson the hard way,” Griffin said.
Indeed, protecting these rookie traders was a priority for the Aussie regulator. The restrictions did not come overnight as ASIC was discussing trading product intervention measures for a few years.
Additionally, the CFDs curb followed the fraud by several binary options operators, an instrument criticized in most of the reputed jurisdictions. A few days before the official announcement of the CFDs restrictions, an Aussie court fined AlphaBinary AUD 75 million.
However, TRAction Fintech’s Quinn Perrott does not think these restrictions are necessary.
“I don’t believe they were necessary, changing the leverage doesn’t change the outcome for clients,” Perrott told Finance Magnates. “The clients’ win-loss ratio remains the same even if it happens at a slower pace.”
“Having said that, I also don’t think it is an overstep. It is well within regulator rights and aligning ASIC with global regulations was essential as a de-facto obligation.”
Many top global regulators are pushing for the imposition of tougher regulations. As Sophie Gerber, director of Sophie Grace Compliance & Legal, explained, the market watchdogs are realizing the drawbacks of the 'buyer beware' guides, which are often ignored by retail traders.
“In Australia, we are seeing the liberal government start to move away from this in other areas, such as responsible lending laws for credit contracts on the cards to be abandoned in 2021. It will be interesting to see if other product intervention measures start coming under pressure from the government,” Gerber said.
Market Pullback
Though the brokers are supporting the regulations, they are expecting significant shrinkage in the trading volumes. We have seen a similar trend in the European markets after the imposition of ESMA leverage restrictions.
But, according to Perrott, the 30:1 leverage limit is going to be a global standard.
“Our experience in Europe after the ESMA changes were implemented was an approximately 30 percent drop in daily transaction numbers. We anticipate the impact after the ASIC start date of 29 March 2021 to be slightly less,” he said.
OANDA recently posted a 20 percent decline in the revenue of the European business in 2019. Though the brokerage operator cited the impact of ESMA restrictions behind the slump, it surprisingly welcomed the restrictions.
Griffin believes that leverage limits ensure if “traders fully understand the risk and limiting their ability to blow up their accounts."
“We've always been conservative when it comes to margin requirements, introducing responsible leverage that is at the lower end of the market. As such, we view ASIC’s upcoming leverage restrictions as positive, enforcing greater protection for all traders while also giving credibility to the retail trading industry. They will bring leverage levels on OTC derivatives products in line with similar products offered via exchange-traded futures,” he said
As the restrictions are only limited to the retail accounts, we could see an increase in deposits by the expert traders. But, the possibility of a volume construction persists.
AFS License - the Gateway to the Asia-Pacific Market
With its vigilantism over the market participants, ASIC has gained a reputation as a financial market regulator. Many brokerages are using the AFS license to offer services across many Asian countries.
Moreover, the demand for the AFS license is increasing as in the annual period between 2019 and 2020, the regulator issued 394 new licenses, but also suspended and canceled the operational rights of a few.
Although the regulator still needs to improve its oversight frameworks by tightening many loopholes.
As iSignthis CEO, John Karantzis pointed out, “ASIC still licenses Binary Options operators. This is a quirk that I think is unique (or almost so) to Australia, and I understand that, whilst ASIC is keen to make changes, that the policy decision sits with Treasury.”
The Aussie watchdog further needs to improve the transparency of its licensing to become at par with the UK’s FCA or the ESMA.
“Whilst we have licensing and product to supply, such as Mastercard, Diners, Discover, flykk (ex EU) and some further domestic APM’s, we are unlikely to support CFD/FX outside of the UK and the EEA, which jurisdictions have the benefit of transparent licensing and regulatory regimes,” Karantzis said.
Brokers Are Ditching Offshore Route
While tightening the regulations has forced many brokerages to set up offshore shops, that trend is in decline because of the many complications like banking services and client awareness.
“We are still seeing an active interest in brokers wanting to purchase an existing entity in Australia or establish a presence here,” Gerber added. “Existing players are keen to stay and make the necessary changes prior to the start date in March 2021. There is a lot of work to be done but our observation is that brokers are on track.”
The Australian Securities and Investments Commission (ASIC) is going to implement restrictions on the retail contract for difference (CFDs) market. Their impact on the trading market can be huge as the Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. Read this Term levels will be restricted up to 30:1 from the usual existing offerings of 400:1 on major currency pairs.
These restrictions can impact the existing trading market momentum but are deemed to be necessary. They are more in line with curbs imposed by the European regulator in mid-2018 on retail leverages and marketing.
Explaining the importance of the restrictions, OANDA Australia’s Managing Director, Anthony Griffin, pointed out the losses of the 'countless less-experienced traders', who often take high leverage positions without knowing the risk of liquidation if the prices go the other way.
“Many of these traders undoubtedly learned their lesson the hard way,” Griffin said.
Indeed, protecting these rookie traders was a priority for the Aussie regulator. The restrictions did not come overnight as ASIC was discussing trading product intervention measures for a few years.
Additionally, the CFDs curb followed the fraud by several binary options operators, an instrument criticized in most of the reputed jurisdictions. A few days before the official announcement of the CFDs restrictions, an Aussie court fined AlphaBinary AUD 75 million.
However, TRAction Fintech’s Quinn Perrott does not think these restrictions are necessary.
“I don’t believe they were necessary, changing the leverage doesn’t change the outcome for clients,” Perrott told Finance Magnates. “The clients’ win-loss ratio remains the same even if it happens at a slower pace.”
“Having said that, I also don’t think it is an overstep. It is well within regulator rights and aligning ASIC with global regulations was essential as a de-facto obligation.”
Many top global regulators are pushing for the imposition of tougher regulations. As Sophie Gerber, director of Sophie Grace Compliance & Legal, explained, the market watchdogs are realizing the drawbacks of the 'buyer beware' guides, which are often ignored by retail traders.
“In Australia, we are seeing the liberal government start to move away from this in other areas, such as responsible lending laws for credit contracts on the cards to be abandoned in 2021. It will be interesting to see if other product intervention measures start coming under pressure from the government,” Gerber said.
Market Pullback
Though the brokers are supporting the regulations, they are expecting significant shrinkage in the trading volumes. We have seen a similar trend in the European markets after the imposition of ESMA leverage restrictions.
But, according to Perrott, the 30:1 leverage limit is going to be a global standard.
“Our experience in Europe after the ESMA changes were implemented was an approximately 30 percent drop in daily transaction numbers. We anticipate the impact after the ASIC start date of 29 March 2021 to be slightly less,” he said.
OANDA recently posted a 20 percent decline in the revenue of the European business in 2019. Though the brokerage operator cited the impact of ESMA restrictions behind the slump, it surprisingly welcomed the restrictions.
Griffin believes that leverage limits ensure if “traders fully understand the risk and limiting their ability to blow up their accounts."
“We've always been conservative when it comes to margin requirements, introducing responsible leverage that is at the lower end of the market. As such, we view ASIC’s upcoming leverage restrictions as positive, enforcing greater protection for all traders while also giving credibility to the retail trading industry. They will bring leverage levels on OTC derivatives products in line with similar products offered via exchange-traded futures,” he said
As the restrictions are only limited to the retail accounts, we could see an increase in deposits by the expert traders. But, the possibility of a volume construction persists.
AFS License - the Gateway to the Asia-Pacific Market
With its vigilantism over the market participants, ASIC has gained a reputation as a financial market regulator. Many brokerages are using the AFS license to offer services across many Asian countries.
Moreover, the demand for the AFS license is increasing as in the annual period between 2019 and 2020, the regulator issued 394 new licenses, but also suspended and canceled the operational rights of a few.
Although the regulator still needs to improve its oversight frameworks by tightening many loopholes.
As iSignthis CEO, John Karantzis pointed out, “ASIC still licenses Binary Options operators. This is a quirk that I think is unique (or almost so) to Australia, and I understand that, whilst ASIC is keen to make changes, that the policy decision sits with Treasury.”
The Aussie watchdog further needs to improve the transparency of its licensing to become at par with the UK’s FCA or the ESMA.
“Whilst we have licensing and product to supply, such as Mastercard, Diners, Discover, flykk (ex EU) and some further domestic APM’s, we are unlikely to support CFD/FX outside of the UK and the EEA, which jurisdictions have the benefit of transparent licensing and regulatory regimes,” Karantzis said.
Brokers Are Ditching Offshore Route
While tightening the regulations has forced many brokerages to set up offshore shops, that trend is in decline because of the many complications like banking services and client awareness.
“We are still seeing an active interest in brokers wanting to purchase an existing entity in Australia or establish a presence here,” Gerber added. “Existing players are keen to stay and make the necessary changes prior to the start date in March 2021. There is a lot of work to be done but our observation is that brokers are on track.”