ASIC calls on retail OTC derivatives sector to improve practices


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ASIC calls on retail OTC derivatives sector to improve practices

June 29, 2018

ASIC LogoASIC has called on participants in the retail OTC derivatives sector to improve their practices after recent ASIC activities showed their conduct fell short of expectations.

The products offered by retail OTC derivatives issuers in Australia include binary options, margin foreign exchange and contracts for difference.

A recent review of 57 retail derivative issuers identified a number of risks associated with the products offered to retail investors by OTC derivatives issuers.

Our review found that client losses in retail OTC derivatives trades seemed high, with the percentage of unprofitable traders being up to 80% for binary options, 72% for CFD traders and 63% for Margin FX traders. ASIC will examine this area further as part of its ongoing focus on the sector.

ASIC’s recent supervisory activities have also revealed sector-wide concerns about certain practices.

The most concerning practices ASIC has identified during in its supervision of the sector and highlighted in our recent reviews include:

  • actual client profits being inconsistent with marketing materials
  • a lack of transparency around pricing
  • risk management practices that relied on the use of client money were outdated and needed to be reviewed
  • some referral arrangements that may be in breach of conflicted remuneration requirements and referral selling prohibitions
  • some issuers that were providing wholesale services or allowing third parties to ‘white label’ their products did not have adequate risk management practices and operational capital to supervise counterparties and support their exposures.

Binary options may be the least transparent in terms of underlying pricing, strike prices and payout structures.

To address these risks, ASIC has called on issuers to:

  • review and update their risk management and client money practices; and
  • assess whether their arrangements with counterparties and referrers meet their AFS licence obligations.

ASIC Commissioner Cathie Armour said, ‘The retail OTC derivatives sector in Australia is an active and growing market, with an annual turnover of $11 trillion and over 450,000 investors. The integrity of the retail OTC derivatives sector is a key focus for ASIC. ASIC expects licensed issuers to conduct themselves appropriately and ensure consumers trade in retail OTC derivatives with a clear understanding of the products and the risks to which they’re exposed. We will be working with issuers to raise industry standards and improve compliance with their Australia financial services licence obligations.’

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