Breaking：ASIC Officially Confirms its Product Intervention Measures on CFDs

The Australian Securities and Investments Commission ​(ASIC) has officially confirmed its product intervention measures on the issue and distribution of contracts for difference (CFDs) to retail clients. The new rules will come into effect as of the end of March 2021.

Similar to ESMA’s restrictions in CFD leverage, 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).

However, ASIC adopts different rules in risk warning. ASIC 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).

Large Retail Client Lose Requires Customer Protection

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.”

According to the announcement by ASIC, 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.