ASIC strengthens CFD protections for retail clients

In a public update, ASIC said the order will strengthen consumer protections by reducing the 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 in line with protections in force in comparable markets elsewhere.

The product intervention order, which will apply from 29 March 2021, 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

The order will also standardise CFD issuers’ margin close-out arrangements that act as a circuit breaker to close out one or more of a retail client’s CFD positions before all or most of the client’s investment is lost.

It will also 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 such as offering trading credits and rebates or “free” gifts like iPads.

ASIC 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.

“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,” the corporate regulator said.

Reviews conducted by ASIC 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, ASIC stated that 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,” it said.

“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 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 the European Union,” Ms 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.”

SMSF Adviser reported last month that a surge in applications for Legal Entity Identifiers (LEIs) in recent months by SMSFs pointed to a growing interest in these products by SMSF investors.

APIR Systems chief executive Chris Donohoe said applications for LEIs had almost doubled in the past financial year, with SMSFs accounting for a large percentage of these.

SMSFs are required to apply for a LEI where they want to trade in non-exchange-traded instruments such as CFDs and foreign exchange.

ASF Audits head of education Shelley Banton previously said that with official interest rates at an all-time low, SMSF trustees are becoming tempted by riskier assets such as derivatives.

“Typically, very few SMSFs make a profit from these types of investments. And unless they’re professional stockbrokers, most of them post losses (sometimes significant ones) and take only short-term gains,” Ms Banton stated.

“SMSF trustees need to understand all the risks and make sure they have the correct documentation in place. In most cases, SMSF trustees will be betting against professionals, and every contract they enter into has a winner and a loser.”