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Monday 12 July 2010

10-153MR Providers need to do more to ensure investors understand the risks of CFD trading

Australian issuers of the derivative products called Contracts for Difference (CFDs) needed to do much more to ensure investors understood the significant risks in trading these complex financial products, a study from the Australian Securities and Investments Commission, has found.

The study, Report 205 Contracts for Difference and Retail Investors (REP 205), also found retail investors are confused about how CFDs work, do not understand the significant risks in trading CFDs, do not seek financial advice before investing, and often, do not receive sufficient information to make informed decisions about trading CFDs.

CFDs are a highly leveraged derivative product marketed to and traded by retail investors. CFDs are essentially a leveraged bet on future changes in the market price of a share or commodity, or the value of an index or a currency exchange rate. The majority of CFDs are issued and traded over the counter (OTC).

In 2009, ASIC conducted a ‘healthcheck’ of the CFD market in response to the rapid growth in number of CFD traders and issuers in recent years, and the market’s predominance of retail investors.

ASIC Commissioner, Mr Greg Medcraft, said: ‘We have monitored the CFD market for some time because of the complex nature of these products and the risks involved.

‘Our healthcheck study shows CFD issuers need to lift their game in making sure investors understand how CFDs work and are aware of the very significant risks when trading these complex financial products,’ Mr Medcraft said.

The ASIC study looked at:

  • CFD issuer business and pricing models
  • advertising by CFD issuers
  • CFD seminars
  • CFD Product Disclosure Statements (PDSs)
  • complaints by retail investors against CFD issuers.

It also contains the findings of investor research ASIC commissioned with CFD traders and potential traders.

In the report ASIC’s recommendations for future action in the CFD market include:

  • disclosure benchmarks for OTC CFDS on an ‘if not, why not’ basis
  • continued monitoring of CFD advertising
  • publication of an investor guide to help retail investor understanding
  • possible law reform, in the event these actions deliver an unsatisfactory outcome.

Concurrently with REP 205, ASIC is also releasing Regulatory Guide 212 Client money relating to dealing in OTC derivatives (RG 212). This guide provides issuers with clear guidance on ASIC’s expectations on what they need to do to comply with the client monies provisions of the Corporations Act, and what information they need to disclose to investors.

ASIC is also soon to release a consultation paper on enhanced PDS disclosure benchmarks for OTC CFD issuers with the aim of raising the quality of information provided to investors.

One potential benchmark under consideration is that OTC issuers should have clear client suitability policies in place.

‘This is a growing market of mum and dad investors that are trading risky and complex financial products.

‘We want investors to get a clearer picture of what they are getting involved with and ensure CFD providers are honest and upfront with investors about the risks involved,’ Mr Medcraft said.

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Last updated: 12/07/2010 12:00