New Australian CFD regulations. What are they and when will they come into force?

Following multiple reviews, long expected changes to CFD regulation in Australia were announced by ASIC at in October. But what do these changes mean and when will they come into force?

ASIC has long signalled that it would be following in Europe’s footsteps when it comes to restrictions on CFD trading.

In August of 2018, ESMA (The European Securities and Markets Authority) published new regulations for CFD providers operating in Europe. These restrictions include leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on a per account basis; preventing the use of incentives by CFD providers; and a firm specific risk warning delivered in a standardised way.

Since the ESMA restrictions came into force, ASIC has been analysing the Australian CFD industry closely, specifically losses made by retail CFD traders. In a large study conducted over the course of 2018, ASIC found that 72% of retail CFD traders lost money, amounting to 1.5 billion AUD in total losses.

Another survey by ASIC was conducted over the course of March/April 2020 which found that traders were incurring losses at a larger rate than ever, most likely a result of pandemic-related trading. Most worrying, ASIC found that during this period over 15,000 retail CFD traders fell into negative balance, owing a total of 10.9 million AUD to brokers. Forex trading in Australia has long been criticised for the lack of mandatory negative balance protection, and the repercussions for consumers are both unwelcome and unsurprising.

In reviewing the results of this data, 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.”

In a direct response to these findings, ASIC has set out new restrictions, that will come into force from 29 March 2021. ASIC’s regulatory interventions will:

• *  restrict CFD leverage offered to retail clients to a maximum ratio of:

  • 30:1 for major currency pairs (AUD, GBP, CAD, EUR, JPY, CHF, USD)

  • 20:1 for minor currency pairs, gold, and indices

  • 10:1 for commodities other than gold

  • 2:1 for cryptocurrencies

  • 5:1 for shares or other assets

• standardise margin close-outs

• *  *  ensure negative balance protection for all CFD traders

• *  prohibit bonuses and promotions (i.e. deposit bonuses, rebates, or gifts)

Amour noted in her comments that these restrictions bring Australia into line with the UK and Europe. But, interestingly, ASIC has not followed through on all ESMA’s changes.

While negative balance protection and the limits on leverage will undoubtedly reduce losses made by retail traders, ASIC declined to force CFD providers to publish a standardised risk warning. This comes following an argument made by some industry insiders that risk warnings can be used as advertising, where some brokers may highlight their smaller loss ratio in comparison to their competitors.

The other major regulatory intervention missing from ASIC’s order is a Best Execution order. Known as RTS 27/28 in Europe, this order mandates that CFD providers always maintain transparent pricing and execution. It also requires brokers to provide the most favourable terms for execution of client orders with particular reference to price, cost and speed. Finally, it also dictates that CFD providers to publish a best execution policy and establish an oversight process to ensure that this policy is followed.

CFD providers in Europe have long maintained that these requirements are onerous, expensive, and that the cost/benefit for consumers was inadequate, so it is not a total surprise to see this intervention order dropped.

While these changes are coming into force sooner than the Australian CFD industry expect, none of them are a surprise. In fact, there is some relief that ASIC declined to follow ESMA’s lead entirely, highlighting its independence and awareness of the differences between the two markets.

While some traders will be irritated by the leverage restrictions, beginner traders will be better protected – and all traders will celebrate the introduction of negative balance protection. Over the next few months, Australian brokers will begin to implement these changes. And do not doubt that ASIC will be watching very carefully to see how retail traders fare in 2021.