ASIC’s strengthens consumer protections by reducing CFD leverage

Recently the Australian Securities and Investments Commission (ASIC) announced a product intervention order which included restrictions on selling contracts for difference (CFDs) to retail clients, saying it was still concerned about investor protection. This came after the Australian parliament granted ASIC product intervention powers, similar to those exercised by the European Securities and Markets Authority (ESMA) in 2018.

The new regulations also stipulate negative account protection by ensuring that clients are not able to lose more than their trading stake, avoiding a repeat of debacle following the 2015 Swiss Franc collapse. Additionally, to these changes, new ruling imposes a ban for bonuses and other incentives, whether monetary or non-monetary, that may have encouraged overtrading in recent years.

The main objective of ASIC’s order is to improve consumer protections by reducing CFD leverage available to retail customers and by targeting CFD product features and sales practices that amplify retail clients’ CFD losses. It also unifies Australian practice conditions with protections in other comparable markets elsewhere.

New changes were not well taken by brokers. The biggest disappointment has been decision to limit how much leverage they can offer to their customers. From 29 March 2021, regulated Forex brokerage companies are forced to limit the leverage they offer to a maximum of 30:1.

ASIC’s product intervention order will also restrict CFD leverage offered to retail clients to a maximum ratio of 20:1 for CFDs referencing an exchange rate for a minor currency pair, gold or a major stock market index, 10:1 for CFDs referencing a commodity (other than gold) or a minor stock market index, 2:1 for CFDs referencing crypto-assets, 5:1 for CFDs referencing shares or other assets.

ASIC’s rules will forbid bonuses and other incentives by prohibiting giving or offering certain inducements to retail clients, for example, offering trading credits and rebates or ‘free’ gifts like iPads.

To improve customers protection product intervention order will standardize CFD issuers’ margin close-out arrangements that act as a circuit breaker to close-out one or more a retail client’s CFD positions before all or most of the client’s investment is lost. Also, new restrictions include protection against negative account balances by limiting a retail client’s CFD losses to the funds in their CFD trading account.

These restrictions were introduced based on ASIC reviews in 2017, 2019 and 2020, which found that most retail clients lose money trading CFDs. During a volatile five-week period in March and April 2020, the retail clients of a sample of 13 CFD issuers made a net loss of more than $774 million. The leverage ratio limits in the order aim to reduce the size and speed of retail clients’ losses by reducing CFD exposure and sensitivity to market volatility. This follows similar measures introduced in major overseas markets, including the United Kingdom and European Union.

Product intervention order will remain in force for 18 months, after which it may be extended or made permanent. Civil and criminal penalties apply to contraventions of the product intervention order.

If you are interested in moving your business offshore or obtain forex license in jurisdiction without leverage restriction, Offshorelicense team would gladly help you to obtain a forex license in countries like Mauritius or Seychelles.

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