The corporate regulator has used its product intervention powers to impose conditions on the distribution of contracts for difference (CFDs) to retail clients.
ASIC said it had intervened in the products by reducing the degree of leverage that could be offered to retail investors within a CFD.
From 29 March 2021, ASIC said retail clients could only be offered a maximum gearing 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 major stock market index, and 10:1 for CFDs referencing a commodity other than gold or a minor stock market index.
Further, retail investors would be restricted to leverage ratios of 2:1 for CFDs referencing crypto-assets and 5:1 for CFDs referencing shares or other assets.
ASIC would also implement further restrictions to standardise CFD providers’ margin close-out arrangements, limit retail clients’ CFD losses and prohibit offering inducements to clients to invest in CFDs.
The regulator said the changes would strengthen protections for retail clients after ASIC investigations found they were likely to lose money from investing in CFDs.
“During a volatile five-week period in March and April 2020, the retail clients of a sample of 13 CFD issuers made a net loss of more than $774 million,” ASIC said.
“During this period, over 1.1 million CFD positions were terminated under margin close-out arrangements, compared with 9.3 million over the full year of 2018; [and] more than 15,000 retail client CFD trading accounts fell into negative balance owing a total of $10.9 million (compared with 41,000 accounts owing $33 million over the full year of 2018).”
ASIC commissioner Cathie Armour said the heavy losses highlighted the need for stronger CFD protections through the product intervention order, which would remain in place for 18 months.
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