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Friday 23 October 2020

20-254MR ASIC product intervention order strengthens CFD protections

ASIC has made a product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients.

ASIC’s order strengthens consumer protections by reducing CFD leverage available to retail clients and by targeting CFD product features and sales practices that amplify retail clients’ CFD losses. It also brings Australian practice into line with protections in force in comparable markets elsewhere.

From 29 March 2021, ASIC’s product intervention order will: 

  • 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
  • standardise 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
  • protect against negative account balances by limiting a retail client’s CFD losses to the funds in their CFD trading account, and
  • prohibit giving or offering certain inducements to retail clients (for example, offering trading credits and rebates or ‘free’ gifts like iPads).

ASIC also confirmed it will not require issuer-specific risk warnings or other disclosure-based conditions as originally proposed in Consultation Paper 322 Product intervention: OTC binary options and CFDs (CP 322).

The order strengthens protections for retail clients trading CFDs after ASIC found that CFDs have resulted in, and are likely to result in, significant detriment to retail clients. 

ASIC reviews in 2017, 2019 and 2020 found that most retail clients lose money trading CFDs.

During a volatile five-week period in March and April 2020, the retail clients of a sample of 13 CFD issuers made a net loss of more than $774 million. During this period:

  • over 1.1 million CFD positions were terminated under margin close-out arrangements (compared with 9.3 million over the full year of 2018)
  • more than 15,000 retail client CFD trading accounts fell into negative balance owing a total of $10.9 million (compared with 41,000 accounts owing $33 million over the full year of 2018). Some debts were forgiven.

ASIC Commissioner Cathie Armour said, ‘Heavy losses sustained by retail clients trading in highly leveraged CFDs and ongoing market volatility during the COVID-19 pandemic highlight the need for stronger CFD protections in the product intervention order.’

‘The leverage ratio limits in the order aim to reduce the size and speed of retail clients’ losses by reducing CFD exposure and sensitivity to market volatility. This follows similar measures introduced in major overseas markets, including the United Kingdom and European Union’ Commissioner Armour said.

The order will remain in force for 18 months, after which it may be extended or made permanent. Civil and criminal penalties apply to contraventions of the product intervention order.

ASIC’s consideration of feedback on its proposal in CP 322 to ban the issue and distribution of binary options to retail clients is ongoing.

Background

Regulatory Guide 272 Product intervention power provides an overview of ASIC’s product intervention power, when and how ASIC may exercise the power, and how a product intervention order is made.

On 22 August 2019, ASIC released CP 322 seeking feedback on proposals to use its product intervention power to address significant detriment to retail clients resulting from over-the-counter (OTC) binary options and CFDs (refer 19-220MR). CP 322 attracted over 400 responses from consumers, consumer groups, CFD issuers, industry bodies and other stakeholders.

A CFD is a leveraged derivative contract that allows a client to speculate in the change in value of an underlying asset, such as foreign exchange rates, stock market indices, single equities, commodities or cyrptoassets.

In ASIC’s product intervention order:

  • major currency pair means any two of the Australian dollar, British pound, Canadian dollar, euro, Japanese yen, Swiss franc and US dollar;
  • a minor currency pair is any currency pair that is not a major currency pair;
  • major stock market indices are the CAC 40, DAX, Dow Jones Industrial Average, EURO STOXX 50 Index, FTSE 100, NASDAQ-100 Index, NASDAQ Composite Index, Nikkei Stock Average, S&P 500 and S&P/ASX 200;
  • a minor stock market index is any stock market index that is not a major stock market index.

In addition to the product intervention order, ASIC’s actions to address concerns about CFDs include:

  • enforcement action to address misconduct (for example, refer 20-246MR and 20-161MR)
  • public warning notices and other statements
  • surveillance projects and thematic reviews
  • stronger regulations
  • extensive retail client education campaigns and guidance for CFD issuers.

On 16 October 2020, the Federal Court ordered that AGM Markets Pty Ltd (AGM), OT Markets Pty Ltd (OTM) and Ozifin Tech Pty Ltd (Ozfin) pay a total of $75 million in pecuniary penalties. Justice Beach handed down the penalty following his February 2020 decision that AGM, OTM and Ozifin had engaged in systemic unconscionable conduct while providing over-the-counter (OTC) derivative products to retail investors in Australia (20-048MR). In providing general context concerning OTC derivatives and in considering the objective of general deterrence in setting penalties for the serious contraventions in this case, Justice Beach referred to ASIC’s product intervention proposals relating to CFDs in CP 322 and said:

[27] 'If I may say so, there is considerable merit in ASIC’s proposal, but of course these are policy matters outside my realm of influence. But what I can say is that if such measures had been in place, most of the egregious conduct and its consequences that was exposed in the present case would in all likelihood not have occurred.

[74] Further, as I discussed earlier in my reasons, the regulatory changes proposed are likely to result in a reduced risk of similar conduct being repeated in the future by other market participants or at least significantly ameliorate its scope or effect.'

More information about ASIC’s supervision and enforcement work is available on our website. ASIC’s MoneySmart website has further information about forex trading and CFDs.

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Last updated: 23/10/2020 02:54