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10-154MR ASIC releases guide to improve transparency for retail derivative investors
ASIC has increased its focus on over-the-counter derivatives (OTC derivatives), such as contracts for difference, with the finalisation of a guide on client money which aims to promote better disclosure and help retail investors properly understand the handling of client money and associated counterparty risks.
ASIC’s Regulatory Guide 212 Client money relating to dealing in OTC derivatives (RG 212), follows the release of Consultation Paper 114 Client money relating to dealing in OTC derivatives (CP 114), which invited public comment on its proposals to improve disclosure by a financial services licensee dealing in OTC derivatives and guidance on how it expects licensees to comply with the client money provisions in the Corporations Act.
Client money, in this context, is broadly money paid by a client to a licensee, such as a contracts for difference (CFD) issuer, before the client has traded as well as money that a client has left with a licensee after trading.
‘Contracts for difference are a product regularly traded by the retail market and investors need to understand their risks’, said ASIC Commissioner, Mr Greg Medcraft.
While client money must be held separate from the licensee’s own money, RG 212 asks licensees to consider the adequacy of disclosures to investors, particularly where client money is:
- held in the same account with the money of other clients;
- used to meet a licensee’s trading obligations for other clients; and
- withdrawn from the client money account under the terms of the product disclosure statement or client agreement.
Investors need to be aware that these activities could result in them losing their money if they result in a shortfall in the account. A shortfall could arise if the issuer used the money for trading for another client but could not obtain that money from the other client or cover it themselves.
‘Investors considering trading in OTC derivatives, like CFDs, also need to understand counterparty risk. Counterparty risk arises if a CFD issuer collapses and has used your deposited money’, said Mr Medcraft.
ASIC’s guide aims to promote better disclosure regarding:
- the treatment of money which is paid to, or left with, a licensee;
- the timing and basis of any payments out of the client money account;
- any use of client money to meet a licensee’s trading obligations for other clients;
- the treatment of interest earned on client money; and
- the risks associated with client money.
Concurrently with RG 212, we are also releasing the results of a ‘health check’ into the over- the-counter CFD market, Report 205 Contracts for difference and retail investors (REP 205). This report found that issuers needed to do much more to ensure investors understood the significant risks in trading these complex financial products and sets out ASIC’s recommendations for future action, including enhanced disclosure benchmarks.
‘As a regulator, we seek to ensure that retail investors understand the products they are using prior to trading. The development of this guide reinforces our priority to help investors make informed decisions by promoting better disclosure’, Mr Medcraft said.
ASIC has also issued a report on submissions received in response to CP 114 (REP 202). Non-confidential submissions are available on the ASIC website.