ASIC has imposed conditions on the issue and distribution of CFDs to retail clients. These conditions will be in place from 29 March 2021 to 29 September 2022, after which time they may be extended or made permanent.

From 29 March 2021, CFD leverage offered to retail clients will be restricted 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.

These leverage ratio limits and other changes are being introduced after ASIC reviews conducted in 2017, 2019 and 2020 found that most retail clients lose money trading CFDs. For example, 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.

Strengthening protections for retail clients

These leverage ratio limits will help reduce the size and speed of retail clients’ losses. Standardising CFD issuers’ margin close-out arrangements will provide a circuit breaker to close out retail clients’ CFD positions before they lose all or most of their investment.

The changes will also protect against negative account balances by limiting a retail client’s CFD losses to the funds in their CFD trading account. CFD issuers will also be prohibited from giving or offering certain inducements to retail clients (for example, offering trading credits and rebates or ‘free’ gifts like iPads).

If you are a retail trader and would like to know more about changes to CFD trading, visit the ASIC website.

For more information about Forex trading and CFDs visit Moneysmart.