ASIC License and The New CFD Trading Rules

The Australian Securities and Investments Commission has issued the 2019-20 Cost Recovery Implementation Statement (CRIS). The document specifies the regulatory costs and activities of the financial watchdog.

The report, which is detailed by industry and subsector, states the total cost of ASIC’s supervisory effort is $320,331 million.

OTC derivatives issuers, OTC traders, and securities dealers, belong to the Market Infrastructure and Intermediaries sector.

ASIC states the total cost to be recovered by levy of that particular sector is $62 million, despite having a total operating expenditure of $53,266 million. Surveillance costs $13,083 million, which is the highest among the many sectors.

There are 99 retail OTC derivatives issuers and they cost $10,384 million to regulate, according to the ASIC report. OTC derivatives issuers pay a fixed amount of $108,084.

There are 77 over-the-counter (OTC) traders and they cost $9.661 million. OTC traders pay a minimum levy of $1,000 plus $4,011 per FTE.

There are 1,030 securities dealers and they cost ASIC $1.391 million. Securities dealers pay a minimum levy of $1,000 plus $2.71 per $1 million of annual transaction turnover.

“ASIC is acutely aware of the challenges facing many businesses due to COVID-19 and is committed to working with regulated entities facing difficulties paying industry funding levies. ASIC will consider waivers due to the impact of COVID-19 on a case-by-case basis”, said the announcement.

New CFD Trading Rules in Sight

The ASIC license this year may come at a relatively higher price as CFD trading restrictions are about to come into effect by the end of March. Firms will have to adopt European-like restrictions on such financial products. Furthermore, online brokerages offering CFDs will 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
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).
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.

As we move closer to the implementation date of the new restrictions it won’t be surprising if more AU firms decide to migrate their clients or operations to countries where such CFD intervention measures are not in place.

72% of clients who trade CFDs lose money

ASIC has decided to follow the European approach to CFD trading due to concerns “that retail investors have suffered, and are likely in future to suffer, significant detriment from binary options and CFDs.”

During 2018:

licensed issuers received gross trading revenue of $490 million from binary options and $1.5 billion from CFDs—which can largely be attributed to a combination of net client losses and fees and costs charged to clients
CFD issuers automatically closed out 9.3 million client CFD positions in margin call, and
over 41,000 clients’ CFD trading accounts went into negative balance, totalling -$33 million (that is, clients owed money to the CFD issuer).
A review (REP 579) conducted by ASIC in 2017 found that:

80% of clients who trade binary options lose money
72% of clients who trade CFDs lose money, and
63% of clients who trade CFD over currency pairs lose money.
Complex product features, such as the high leverage offered in CFDs—as high as 500-to-1 for foreign exchange CFDs—or the high likelihood of cumulative losses inherent in binary options, have contributed to retail clients’ financial losses and can often be misaligned with their needs, expectations and understanding.

In 2019, ASIC Commissioner Cathie Armour said: “For many years ASIC has taken strong action to protect consumers of binary options and CFDs, using the range of regulatory tools available to us. However, we are concerned that consumers continue to suffer significant harm from trading these products.”