ASIC renews CFD restrictions after 91% reduction in retail losses

Rick Steves

“Our extension of the product intervention order for five years will ensure that the leverage ratio limits and other protections can continue to reduce the size and speed of retail clients’ CFD losses.”

The Australian Securities and Investments Commission (ASIC) has announced the extension of the CFD product restrictions imposed in 2021 for a further five years to 23 May 2027.

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.

ASIC Commissioner Cathie Armour commented: “We have seen a substantial reduction in harm to retail clients resulting from CFDs as a result of ASIC’s product intervention. Our extension of the product intervention order for five years will ensure that the leverage ratio limits and other protections can continue to reduce the size and speed of retail clients’ CFD losses. These consumer protections are more important than ever during volatile market conditions”.

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.

After ASIC reviews in 2017, 2019 and 2020 found that most retail clients lose money trading CFDs, the regulator imposed restrictions on CFDs issued to retail clients, including:

  • leverage ratio limits ranging from 30:1 to 2:1
  • standardisation of margin-close out rules
  • negative balance protection
  • prohibitions on offering or giving of certain inducements

ASIC also beefed up enforcement action to address misconduct, surveillance projects and public warnings, and promoted retail client education campaigns and guidance for CFD issuers.

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