Aussie CFD trading after March 29: Now what?
“There is still an option to classify certain clients as professional or sophisticated investors and continue offering them 1:500 leverage. The clients will have to demonstrate their understanding of financial markets, prior trading experience, and/or income/net worth”, said Natalia Zakharova, Head of Business Development at FXOpen.
ASIC new rules on CFD products will come into effect from 29 March 2021. It will bring leverage restrictions and negative balance protection, as well as ending inducements in the sale of CFDs and standardizing margin close-out arrangements.
These restrictions were introduced based on ASIC reviews in 2017, 2019 and 2020. These have found that most retail clients lose money trading CFDs. The retail clients of a sample of 13 CFD issuers made a net loss of more than $774 million in the most volatile five-week period of the pandemic (March and April 2020).
The new leverage restrictions aim to reduce retail clients’ CFD exposure and sensitivity to market volatility. The UK and European Union have already addressed those issues with CFD products.
ASIC was also feeling the heat from the corporate sector and consumer advocates for its approach to enforcement and its failure to police fraudulent behavior and risky products.
In the past few months, Australian brokers have been updating their operational and compliance processes to address ASIC’s product intervention order to:
restrict CFD leverage offered to retail clients to a maximum ratio of:
30:1 for CFDs referencing an exchange rate for a major currency pair
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
Brokers will also have to 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. Protection against negative account balances and end all trading credits, rebates, or gifts to customers.
What now? Going offshore, expansion to other markets, and pro accounts
Much has been said about what CFD trading brokers would do amid the profound impact that leverage restrictions will have on business operations. Some brokers have decided to cancel their ASIC license and go offshore. Others are reacting to the expected drop in volumes and revenues by expanding to other markets.
The fact of the matter is that the leverage restrictions will affect retail traders, who are more likely to misunderstand the complexities of leverage and risk management.
Professional traders, who don’t often blow their accounts and are there for the long run, are not subject to the new rules. This is likely to lead to a cleaner CFD trading environment and more investment in trading education from brokers, in order to promote retail accounts to “pro accounts”.
FinanceFeeds spoke to Natalia Zakharova, Head of Business Development at FXOpen, a global company that has a regulatory license in Australia, as well as in the UK and European jurisdictions, to ascertain her view on the future within ASIC-regulated FX and CFD entities.
“The whole industry saw ASIC’s new regulations coming so it wasn’t a surprise. I think Australian brokers had a good ride for 2.5 years almost exclusively offering high leverage and trading in the regulated environment.
“Now they will have to learn to adapt to new rules, new trading volumes, and potentially new profits. However, there is still an option to classify certain clients as professional or sophisticated investors and continue offering them 1:500 leverage.
“The clients will have to demonstrate their understanding of financial markets, prior trading experience, and/or income/net worth. AU brokers always projected a certain image and targeted high-quality clients, therefore, I believe that an important part of clients will be able to upgrade their accounts to pro status”, Ms. Zakharova stated.
Indeed, under the Corporations Regulations 2001 (Reg 7.6.02AG), foreign CFD and FX brokers do not need to hold an Australian Financial Services Licence (AFSL) when dealing with professional investors in Australia.
Reg 7.6.02AG(2E) provides an exemption for CFD and FX dealers to hold an AFS Licence when the entity (FX and CFD adviser, dealer, or market maker) is not an Australian entity and the client is a “professional investor”.
Pro investors, however, are not entitled to protections afforded to retail clients under the Corporation Act 2001 (Cth), including access to the Australian Financial Complaints Authority, which has discretion to exclude complaints from wholesale clients.