Australia awakes with a significant drop in leverage

Rick Steves

Most retail brokers offering CFD products have updated their processes and announced the changes to their clients while reminding them that Professional Accounts are exempt from the new ASIC rules.

ASIC’s new restrictions on CFD products have come into effect today, March 29, 2021. The regulatory intervention aims to strengthen protections for retail clients.

The maximum CFD leverage available to retail clients will range from 30:1 to 2:1, depending on the underlying asset class. Before now, a retail investor’s CFD exposure could be as much as 500 times their original outlay.

This is expected to result in a drop in operating revenues for retail CFD brokers as it happened in other jurisdictions which have made similar changes, such as the European Union and the United Kingdom.

ASIC also targets CFD product features and sales practices that amplify retail clients’ CFD losses, such as providing inducements to become a client or to trade, which is also in line with the recent CFD product intervention by ESMA.

Cathie Armour, ASIC Commissioner, commented: “We will closely monitor compliance with the product intervention order and won’t hesitate to take appropriate action to enforce the order.

“We are also paying careful attention to changes in CFD providers’ reported holdings of retail client money and any misclassification of retail clients as wholesale clients, which would risk denying them important rights and protections. Protecting retail investors from harm, particularly at a time of heightened vulnerability, is a priority for ASIC.”

Australian brokers were given a few months to update 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.

Violations of the new CFD products may result in a maximum of five years’ imprisonment for individuals and pecuniary penalties of up to $555 million for corporations.

Retail clients will have the right to recover the amount of loss or damage suffered because of any given product contravention made by a broker.

Most retail brokers offering CFD products have updated their processes and announced the changes to their clients while reminding them that Professional Accounts are exempt from the new ASIC rules.

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