ASIC continues to respond to high incidence of misconduct in retail OTC derivatives sector

Maria Nikolova

More than 80% of OTC retail derivatives clients reside offshore, including in high risk AML countries and countries which have restricted the sale of these products.

The Australian Securities & Investments Commission (ASIC) continues to respond to a high incidence of misconduct in the retail OTC derivatives sector and to see large sums of client losses. This was made clear by Commissioner Cathie Armour who delivered a speech at the ACI Redefining Conduct in FX Markets Seminar held in Sydney on August 14, 2019.

The products offered by retail OTC derivatives issuers in Australia include Forex products as well as binary options and other contracts for difference.

Last year, ASIC published results of a review that found high rates of client losses in retail OTC derivatives trades, with the percentage of unprofitable clients being up to 80% for binary options, 72% for CFD traders and 63% for margin FX traders.

The regulator keeps responding to high levels of misconduct in the sector and to see heavy client losses. The complaints ASIC and the Australian Financial Complaints Authority (AFCA) have received from clients has grown significantly over the past year, Commissioner Armour noted.

In April 2019, ASIC conducted a review of the licensed entities active in retail OTC derivatives. The regulator found that the number of retail clients trading OTC derivatives has doubled in the past two years.

In summary:

  • Over 60 CFD and binary options issuers are licensed in Australia.
  • The retail OTC derivatives market has an annual turnover of $21 trillion and over 1 million investors, 99% of which are retail clients.
  • Of the 675 million transactions in the 2018 calendar year, 426 million of these were in FX products – that’s over 60%. In ASIC’s previous review, there were 165 million transactions in FX products. So there has been a steep growth in these FX products, and this growth has been much faster than the growth in the number of other CFD or binary option transactions over the same period.
  • Despite this high number of FX product transactions, margin FX represents around 32% in terms of net revenue, behind CFDs at 39%.
  • Further, over 80% of OTC retail derivatives clients reside offshore, including in high risk AML countries and countries which have restricted the sale of these products.
  • Licensed issuers hold over $2.9 billion on behalf of clients, an increase of 45% from the previous review.
  • Many margin FX issuers offer leverage of 400:1 and higher, the Commissioner said. She did not specify, however, the precise number of such entities.

ASIC will continue to review the data it has gathered and will address the key themes and concerns that arise from the review. Where the regulator sees that products or practices in this sector have resulted in, or are likely to result in, significant consumer harm then the regulator will address this harm using the full range of power available to it.

Commissioner Armour also mentioned the recent ASIC warning to brokerages about certain overseas activities. Regulators in many jurisdictions, such as in China, Europe, New Zealand, Israel, Japan and North America have restricted or prohibited the provision to retail investors of certain OTC derivatives.

ASIC has publicly warned Australian issuers that they may be dealing with offshore investors illegally and to cease any non-compliant activities. There may be consequences overseas for potential breaches of overseas law, but in any event, ASIC will consider whether breaching overseas law is consistent with obligations under Australian law to provide services efficiently, honestly and fairly.

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