ASIC has banned the offering of binary options to retail clients with effect from Monday 3 May 2021. The decision was announced days after the new CFD trading rules taking effect on May 29, 2021.
ASIC found that binary options have resulted in and are likely to result in significant detriment to retail clients. Approximately 80% of retail clients lost money trading binary options from the reviewed period between 2017 and 2019.
These instruments are likely to result in cumulative losses to retail clients because of their ‘all or nothing’ payoff structure, short contract duration, and negative expected returns.
Cathie Armour, Commissioner at ASIC, said: “‘Binary options’ product characteristics make them incompatible with investment or risk management use by retail clients. ASIC’s product intervention order will protect retail investors from these harmful products at a time of heightened vulnerability.”
In 2018, retail clients are estimated to have incurred in net losses of $400 million from trading binary options. In April 2019, ASIC issued a warning against providing unlicensed or unauthorized services to clients located in several foreign jurisdictions, which has led to a decrease in trading volumes, hence reduced net losses of around $6.7 million in 2019.
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.
Binary options are cash-settled, over-the-counter (OTC) derivatives with an ‘all-or-nothing’ payout which is determined by the occurrence or non-occurrence of a specified event in a defined timeframe. This can include an event related to movements in the price of a financial product or a market index.
CFD Trading Restrictions Have Gone Live on March 29, 2021
Firms under ASIC’s jurisdiction have adopted European-like restrictions on CFD products, and are no longer be able to use bonuses and other non-monetary incentives to try and attract new traders.
Starting 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
standardize 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).
The significant drop in available leverage being offered to clients following the implementation of the restrictions once again brings up the topic of “going offshore”. Indeed quite a few AU registered online brokerages have already made the decision to onboard non-AU customers to island jurisdictions in order to maintain the same trading parameters for customers who want leveraged trading products.
The Industry Spread spoke to Natalia Zakharova, Head of Sales at FXOpen, about the newly imposed contracts for difference (CFD) restrictions for ASIC licensed brokers and how did her company respond.
“Our strategy for our ASIC-regulated entity didn’t change at all. As a group of brokers operating under the FXOpen brand, we aim to offer a wide range of products and cater to very different clients. This particular restriction was expected and we are pleased to say that there are FXOpen brokers which are not affected by this change – so we didn’t need to change our strategy.”