ASIC driving Pro Clients away to UK and EU-regulated brokers
ASIC’s leverage restrictions for retail CFD trading triggered a lot of interest from clients willing to switch to pro status. The complexity of the procedure has quickly extinguished the potential to retain key trading volumes for AU-based brokers as traders are looking elsewhere to establish pro accounts.
FinanceFeeds has reported extensively on ASIC’s new rules on CFD products for retail traders in Australia, which have come into effect on March 29, 2021.
Australian retail CFD client losses were just over $428 million gross (or $234 million net) during the week 16–22 March 2020, probably the most volatile week ever recorded in trading markets. These losses might have been the last straw for ASIC.
Many changes took place in the jurisdiction, including protection against negative account balances and bans on trading credits, rebates, or gifts to customers, but the new limits on leverage are likely to hurt brokers the most.
From as high as 500:1 leverage, trading firms are now complying with CFD maximum ratios of 30:1 for major FX pairs, 20:1 for minor FX pairs, gold or a major stock market index, 10:1 for other commodities or a minor stock market index, 2:1 for crypto-assets, and 5:1 for shares or other assets.
Most retail brokers offering CFD products have updated their processes and are getting ready to take a hit in trading volumes. The regulatory changes for CFD products in Australia, similar to ESMA’s new rules introduced in 2018 for the EU, were “expected and maybe even overdue”, said Natalia Zakharova, Head of Business Development at FXOpen.
FXOpen is a global company that has a regulatory license in Australia, as well as in the UK and European jurisdictions. We spoke to Ms. Zakharova to ascertain her view on the migration of retail FX traders to Professional Accounts, which are exempt from the new ASIC rules, and to compare Pro accounts between jurisdictions.
“Although most clients are no longer surprised and do not see this in a negative light, brokers are still faced with a lot of clients willing to qualify as professional clients and enjoy high leverage trading.
“As we have three different regulated companies under the FXOpen brand, we can easily compare the pro classification requirements across different regulations as well as the willingness of the clients to reclassify as a wholesale client”, said Ms. Zakharova.
Most regulations require them to be a professional investor, an experienced trader or a high net worth individual, with the FCA and CySEC having identical rules for their MiFID history:
· the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters
· the size of the client’s financial instrument portfolio, defined as including cash deposits and financial instruments exceeds EUR 500,000
· the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged
The information needs to be submitted to the broker and reviewed by the compliance.
ASIC, however, offers four different ways to convert to a pro client: a large company, a professional investor, a high net worth individual, or a sophisticated investor.
The Australian financial watchdog requires personal financial statements to be signed off by certified accountants and the company’s financial statements need to be audited. Professional clients need to prove that they are employed by a financial institution.
“While these requirements are standard for institutional clients, it is not that easy to meet them for retail clients willing to trade with higher leverage”, Ms. Zakharova continued.
“We initially saw a lot of interest from the clients willing to switch to the pro status, which was unfortunately quickly extinguished by the complexity of the procedure. Currently, it is much more difficult to qualify as a pro client with ASIC entities, so FCA and EU-regulated companies might see an influx of pro-clients willing to switch to them.”
It might be a question of time until the Australian Securities & Investments Commission feels the heat of allowing substantial trading volumes to leave its jurisdiction. It is those volumes that fund its regulatory operation.
Most CFD brokers in Australia are part of trading groups with subsidiaries established in other jurisdictions with respected regulatory authorities. This is the case of FXOpen as well.
Unhappy retail traders in Australia who are unable to switch to their pro accounts because of ASIC’s rigidness can still do so through a subsidiary of the same group regulated by a less complicated watchdog, such as the FCA or CySEC.
