Will stricter CFD and FX trading rules affect the vitality of Australian brokers and markets? – Guest Editorial
With ASIC introducing stricter rules around forex and CFD trading in 2021, it leaves the Australian forex trading community wondering whether traders will move to less regulated offshore brokers or welcome the tighter restrictions.
By Tegan Gawron, CompareForexBrokers.com
Forex trading in Australia has been gaining traction for some time now. Yet, with the unprecedented chaos caused by COVID-19, retail trading accounts are being created at 3.4x the rate than in previous years.
In 2019, ASIC announced that the financial authority was moving to strengthen CFD and forex regulation to combat the large losses Australian CFD and forex traders were incurring. While many anticipated the changes to come into effect at the beginning of 2020, it’s assumed the uncertainty and instability caused by COVID-19 caused ASIC to hold off. Yet, unexpectedly, on 23 October the regulator stated that major changes to CFD and forex trading regulation will come into force from 29 March 2021.
Many members of the forex community are speculating the sudden announcement stems from the spike in interest in CFD and forex trading since the outbreak of COVID-19. In March during the peak of the pandemic, Australian CFD and retail traders lost a staggering $428 million in a single week, with over 5,000 traders entering negative balances amounting to -$ 4million.
Intending to reduce the losses retail traders are facing, three major changes to forex trading rules will come into play from March 2021. Following the European model, ASIC will require regulated brokers to enforce level caps, increase investor protections, and not use promotions to induce customers.
Change 1: Reduced Maximum Leverage
Currently, Australian brokers can offer retail traders leverage up to 500:1 when they are trading major forex pairs. While high leverage enables traders to enter larger positions than they would be able to otherwise, the high risk of trading is increased significantly as both profits and losses are magnified. As of next year, ASIC regulated brokers will be obliged to cap forex leverage at 30:1 for major currency pairs and 20:1 for minor and exotic FX pairs.
Change 2: Investor Protection Policies
Although certain Australian brokers offer negative balance protection as a risk management policy, it is not currently required by law. Following the UK’s Financial Conduct Authority’s (FCA) footsteps, all retail traders will be protected by negative balance protection from March onwards. The risk management policy ensures that if traders incur large losses, their trading accounts cannot be pushed into a negative balance that leaves them in debt to their broker.
Change 3: Prohibited Promotions
To curb brokers inducing vulnerable individuals into opening and funding trading accounts without being aware of the risks, ASIC will prohibit certain promotional tactics. Discounted fees and trading for high-volume traders are acceptable, but brokers will not be able to offer gifts such as cash rebates, account credits, sign up bonuses or referral rewards.
In the past, when major financial authorities such as the ESMA or FCA announced stricter CFD and forex regulation, the trading community often speculated that most traders will move to offshore brokers that offer a more relaxed trading environment. Yet, we’ve seen many traders in Europe, UK and now Australia welcome the increased investor protections. When the ESMA introduced similar regulatory changes in 2018, major UK brokers recorded a negligible reduction of 6.7% in net income due to the stricter rules decreasing trading volumes.
Many ASIC regulated brokers such as CMC Markets, IG and Plus500 have publically welcomed the tighter regulation in Australia, with Plus500 stating the changes are similar “in spirit and effect” to ESMA’s regulation. As Australia’s regulatory reputation aligns with the world’s leading financial hubs in Europe and the UK, most brokers do not believe there will be any substantial impact to traders, brokers or the Australian industry at large.