Australia’s Director of CFD & Margin FX Association speaks out against anti-hedging proposals

Last week, FinanceFeeds reported that the newly formed Australian CFD and FX Forum has been seriously considering putting a stop to the practice of FX and CFD companies using client money to hedge against risk, a practice that it considers to be similar to a bookmaker laying off bets with other bookmakers to reduce exposure to a large payout.

This is a common practice among smaller brokerages, however Australia wishes to put an end to his and force such firms to hold client money in trust.

Under the government’s proposed amendment to the Corporations Act, up to 20 small FX brokerages and electronic trading companies in Australia could be forced out of the market or reduce the range of products that they offer because they will not have the financial resources to hold money in trust without hedging.

Subsequent to this having come to light, FinanceFeeds reported that the proposed rule may have been instigated by a lobbying group led by large, established FX companies.

As the proposals have been progressing, Matt Murphie, Director of the CFD & Margin FX Association, has spoken out on the matter, stating that investors would be severely disadvantaged by the proposal, which would outlaw hedging, which is a common method trading firms use to reduce financial risk.

Mr Murphie urged the government to compare the effectiveness of client protection in the UK and Australia.

“In the UK, MF Global operated under the unhedged model, while the Australian firm used the hedged model,” Mr Murphie said.

“In the UK, the distribution payment to clients was short 10 cents in the dollar, while in Australia the distribution was short only 1 cent. Investors in Australia were clearly better off here so why are we using this collapse as a reason to move to UK regulation?”

“We are in complete support of the government’s initiative to enhance the protection of client money within the industry however, we simply wish to use this opportunity to move forward, not backwards” – Matt Murphie, Director, CFD & Margin FX Association.

“Ironically, the government is proposing to ban firms from using client money to hedge against risk, a technique applied by firms to protect a client’s portfolio and ensure client’s money remains safe.”

“We are extremely worried about the Federal Government’s drastic reforms because it will eliminate a large portion of industry players, not protect client money securely and will give mum and dad investors a false sense of security that the reforms have improved protection when statistics show the opposite.”

“Recent examples of collapses in the UK are Alpari and Liquid Markets, both resulting in a significant shortfall in client funds, despite adhering to their local regulations. In contrast, with the exception of MF Global there has not been a single collapse in Australia while adhering to regulations. Fraud and misconduct have been the cause of local collapses so let’s address this.”

Mr Murphie highlighted the fact that the collapse of MF Global and BBY had nothing to do with hedging client money.

“The only causes of companies collapsing in Australia have been proprietary trading and fraud, not hedging,” Murphie said.

“The proposed changes have been aggressively pushed by a small number of larger multi-national firms under the guise of client protection. However, the changes will benefit a few large multinational companies who have a business model of running large amounts of risk and see the legislation as a way of eliminating competition, and many Australian small and medium businesses will suffer” – Matt Murphie, Director, CFD & Margin FX Association.

“If the government goes ahead with this legislation, not only will consumers and firms work under a high-risk model, but business models focused on profitable clients will not be able to survive.”

Mr Murphie urged to government to look at the importance of hedging and to consult the industry before implementing any reforms for the benefit of the sector.
“While the Treasury’s draft policy makes good progress in better protection of client money, eliminating hedging may inadvertently increase financial risk in the sector and leave customer’s vulnerable to losing money,” Murphie said.

“We urge the government to carefully consider the ramifications and to consult key stakeholders in the industry to ensure the end solution addresses the issues appropriately in a way that will benefit customers and the industry.”