Australia Moves to Reduce Leverage on CFDs
Posted by Colin Lambert. Last updated: March 29, 2021
A product intervention order by the Australian Securities and Investments Commission (ASIC) regarding contracts for difference (CFDs) has gone into effect today, 29 March.
The order follows a period of consultation by the Australian regulator into CFDs and binary options and, ASIC says, strengthens protections for retail clients trading CFDs after it found that CFDs have resulted in, and are likely to result in, significant detriment to retail clients.
ASIC’s order reduces CFD leverage available to retail clients and targets CFD product features and sales practices that amplify retail clients’ CFD losses, such as providing inducements to become a client or to trade. It also brings Australian practice into line with protections in force in comparable markets elsewhere.
The maximum CFD leverage available to retail clients will range from 30:1 to a 2:1, depending on the underlying asset class. Before now, a retail investor’s CFD exposure could be as much as 500 times their original outlay. Initial margin on major FX pairs is 3.33% of notional value, in minor currency pairs and gold it is 5% and in crypto assets, 50%.
“We will closely monitor compliance with the product intervention order and won’t hesitate to take appropriate action to enforce the order,” says ASIC commissioner Cathie Armour.
“We are also paying careful attention to changes in CFD providers’ reported holdings of retail client money and any mis-classification of retail clients as wholesale clients, which would risk denying them important rights and protections. Protecting retail investors from harm, particularly at a time of heightened vulnerability, is a priority for ASIC.”
The maximum penalty for a contravention of a product intervention order is five years’ imprisonment for individuals and substantial pecuniary penalties of up to $555 million for corporations. If a court finds that a person has contravened a product intervention order, a retail client may recover the amount of loss or damage suffered because of the contravention.
The product intervention order will remain in force for 18 months, after which it may be extended or made permanent.
ASIC says the proposal to ban the issue and distribution of binary options products to retail clients is still under consideration and a decision has yet to be made.
The decision has been welcomed by ACI Australia, which took part in the ASIC consultation. “ACI Australia is very pleased that ASIC has decided to reduce the leverage available to retail clients on CFDs,” says Keith Sedergreen, president of ACI Australia. “The reputation of the broader Australian FX market is at risk from inevitable spillovers from the retail market and as such today’s implementation is a step in the right direction to ensure that all market participants are aware of the risks involved and are offered adequate protection.”