This Thursday the Australian Securities and Investments Commission (ASIC) has published a consultation paper which proposes to place restrictions on over-the-counter (OTC) binary options and contracts-for-differences (CFDs).

The Australian regulator has proposed to outright ban the issue and distribution of OTC binary options. This is because the watchdog is concerned about the detriment that Australian retail investors have suffered and will continue to suffer at the hands of binary options.

In terms of CFDs, similar to the European Securities and Markets Authority (ESMA), ASIC has proposed a number of restrictions such as imposing  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 limits, enhancing transparency of CFD pricing, execution, costs and risks, implementing  Negative Balance  Negative Balance In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader places a trade that sharply goes against the chosen direction, an account can incur negative balance. Such exposure is traditionally very risky for brokers. While the foreign exchange market is the most liquid market in the world, unexpected economic, geopolitical or cataclysmic events can always cause a market disruption and consequently lack of liquidity.This has occurred during certain events, albeit limited, which have resulted in extraordinarily sharp movements over short timeframes such as the Swiss National Banking Crisis in early 2015.Negative balances are addressed in many jurisdictions globally and clients in the EU are protected from such risks. As a consequence, brokers are the ones which are exposed to the risks associated with covering the negative balance with a prime broker or a prime of prime. New Negative Balance Protections Look to Shield Market ParticipantsAs a countermeasure to the risk associated with negative balances on a wider scale, many brokers now have since adopted negative balance protections. These mechanisms are an automated adjustment of the account balance to zero in case it became negative after a stop out.Traders operating with a broker that offers negative balance protection often cannot lose more than deposited as this shields both the trader and broker from wider losses in times of crisis. In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader places a trade that sharply goes against the chosen direction, an account can incur negative balance. Such exposure is traditionally very risky for brokers. While the foreign exchange market is the most liquid market in the world, unexpected economic, geopolitical or cataclysmic events can always cause a market disruption and consequently lack of liquidity.This has occurred during certain events, albeit limited, which have resulted in extraordinarily sharp movements over short timeframes such as the Swiss National Banking Crisis in early 2015.Negative balances are addressed in many jurisdictions globally and clients in the EU are protected from such risks. As a consequence, brokers are the ones which are exposed to the risks associated with covering the negative balance with a prime broker or a prime of prime. New Negative Balance Protections Look to Shield Market ParticipantsAs a countermeasure to the risk associated with negative balances on a wider scale, many brokers now have since adopted negative balance protections. These mechanisms are an automated adjustment of the account balance to zero in case it became negative after a stop out.Traders operating with a broker that offers negative balance protection often cannot lose more than deposited as this shields both the trader and broker from wider losses in times of crisis. Read this Term protection and a standardised approach to automatic close-outs of client’s CFD positions in margin call.

ASIC proposes 20:1 leverage for all FX pairs

However, the Australian regulator has taken a different approach to the exact leverage limits it will apply. Unlike ESMA, ASIC will 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.

Commenting on the proposed restrictions, ASIC Commissioner Cathie Armour said: “For many years ASIC has taken strong action to protect consumers of binary options and CFDs, using the range of regulatory tools available to us. However, we are concerned that consumers continue to suffer significant harm from trading these products."

“A complete ban would prevent retail clients from losing money trading binary options. We believe binary options provide no meaningful investment or economic use, and have product characteristics similar to gambling products.”

The Aussie regulator is currently seeking feedback on its proposed product intervention measures until the 1st of October 2019.

Today’s announcement is not a complete shock to the markets, as Finance Magnates reported, since the beginning of the year, rumors have been swirling that ASIC will take a similar approach to that of ESMA and implement its own product intervention measures.

Furthermore, the regulator announced in June of this year that it was formally preparing to deploy its product intervention powers shortly.