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Monday 18 October 2021

21-274MR ASIC proposes extending its CFD product intervention order

ASIC has today released Consultation Paper 348 Extension of the CFD Product Intervention Order (CP 348), seeking feedback on a proposal to extend its product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients until it is revoked or sunsets on 1 April 2031.

The product intervention order will expire on 23 May 2022 unless it is extended with the approval of the Minister.

Since 29 March 2021, ASIC’s product intervention order has strengthened protections for retail clients by reducing CFD leverage, standardising margin close-out arrangements, protecting against negative account balances and prohibiting CFD providers from giving certain inducements to retail clients.

During the product intervention order’s first three months of operation, ASIC observed significant improvements in key metrics and indicators of retail client detriment from CFD trading, including:

  • Reduced retail client losses:
    • retail clients made net losses of $22 million from CFD trading—a reduction to 94% of the quarterly average of $372 million in the year prior to the product intervention order
    • there were 45% fewer loss-making retail client accounts compared with the quarterly average in the prior year, whereas the number of profit-making retail client accounts reduced by only 4% across the same period, and
    • aggregate and average losses made by loss-making retail client accounts also decreased.
  • The proportion of profit-making and loss-making retail client accounts was evenly split at 50%, compared with a quarterly average of 36% profit making accounts and 64% loss-making accounts in the prior year.
  • Margin close-outs, where a retail client’s CFD position(s) are closed before all or most of the client’s investment is lost, decreased by 85%.
  • Negative balance instances reduced tenfold for retail clients.

By contrast, the proportion of profit-making and loss-making wholesale client accounts in the period remained relatively stable at 37% and 63% respectively. The product intervention order does not apply to CFDs issued to wholesale clients.

ASIC will continue to monitor and assess the performance of the CFD product intervention order during the consultation period.

ASIC welcomes feedback on CP 348 by 29 November 2021.

Background

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

ASIC made the CFD product intervention order in October 2020 after it found that CFDs have resulted in, and are likely to result in, significant detriment to retail clients (refer 20-254MR). 

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.

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

  • enforcement action to address misconduct (for example, refer 21-051MR, 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.

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: 18/10/2021 12:04