On 23rd October 2020, the Australia Securities and Investment Commission made a product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients.
ASIC’s order strengthens consumer protections by reducing 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 into line with protections in force in comparable markets elsewhere.
From 29 March 2021, 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).
ASIC also 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 (CP 322).
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.