ASIC celebrates retail ban on binary options as 68% of wholesale clients lose money

Rick Steves

In the 13 months before the ban, between 74% and 77% of active retail clients lost money trading binary options. The product intervention order does not apply to wholesale clients.

Could ASIC ban CFD trading in Australia?

ASIC is seeking feedback on a proposal to extend its product intervention order banning the issue and distribution of binary options to retail clients, until it is revoked or sunsets on 1 October 2031.

Australia’s financial watchdog banned the sale of binary options to retail clients, with effect from 3 May 2021, after finding that binary options had resulted in and were likely to result in significant detriment to retail clients.

The product intervention order will expire on 7 October 2022 unless it is extended with the approval of the Minister.

About 75% of retail clients lost money on binary options before ban

Binary options are over-the-counter derivatives that allow clients to speculate on the occurrence or non-occurrence of a specified event in a defined timeframe. This can include an event related to movements in the price of a financial product, a market index or an economic event (such as central bank interest rate decisions).

A recent analysis of the impact of the product intervention order has found that in the 13 months before the ban:

  • between 74% and 77% of active retail clients lost money trading binary options;
  • loss-making retail client accounts made net losses totalling $15.7 million compared with $1.7 million total net profits of profit-making retail client accounts.

The ban has been effective in reducing the risk of significant detriment to retail clients resulting from binary options, according to the regulator, who reminds the industry that retail clients have not made any losses (or profits) from trading binary options with licensed issuers since the product intervention order took effect.

By comparison, 68% of wholesale clients lost money trading binary options in that period as the product intervention order does not apply to them.

ASIC’s actions to address concerns about binary options have included enforcement action to address misconduct, public warning notices and other statements, surveillance projects and thematic reviews, stronger regulations, and extensive retail client education campaigns and guidance for binary option issuers.

ASIC renewed restrictions CFD products

In April 2022, the Australian Securities and Investments Commission announced the extension of the CFD product restrictions imposed in 2021 for a further five years to 23 May 2027.

A CFD is a leveraged derivative contract that allows a client to speculate on the change in value of an underlying asset, such as foreign exchange rates, stock market indices, single equities, commodities or crypto-assets.

Since the product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) came into effect on March 29, 2021, ASIC found retail clients were overall more protected from product features and sales practices that amplify their CFD losses.

The aim of the Australian regulator was to put the jurisdiction in line with other financial watchdogs in comparable markets elsewhere, such as the European Union and the United Kingdom, which have set forth restrictions on CFD products in 2018.

ASIC published a report that summarizes its analysis of the impact of the order, using data from over 60 CFD issuers, and concludes the order has been effective in reducing the risk of significant detriment to retail clients resulting from CFDs.

For instance, ASIC observed during the order’s first six months of operation:

a 91% reduction in aggregate net losses by retail client accounts (from $372 million to $33 million aggregate net loss per quarter on average)
51% fewer loss-making retail client accounts per quarter on average
an 87% decrease in margin close-outs affecting retail client accounts per quarter on average
an 88% reduction in negative balance occurrences for retail clients per quarter on average.

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