Posted: 10 Nov. 2020 05 min. read

ASIC clamps down on the use of CFDs

On 23 October 2020 ASIC issued a Product Intervention Order which seeks to strengthen consumer protections in relation to contracts for difference (CFDs) by reducing the leverage available to retail clients and by targeting product features that amplify retail clients’ CFD losses.

What changes is ASIC making?

ASIC has determined that CFDs have previously resulted in significant financial detriment to retail clients, primarily caused by the use of leverage and the potential for clients’ realised losses to exceed the value of their initial investment.

In order to address these risks, ASIC is requiring CFD providers to implement the following changes by 29 March 2021:

  • Apply the following leverage ratio limits:
    • 30:1 for CFDs referencing a major currency pair exchange rate
    • 20:1 for CFDs referencing a minor currency pair, gold or 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 a crypto-asset
    • 5:1 for CFDs referencing shares or other assets not covered above
  • Standardise margin close-out arrangements by requiring providers to terminate open CFDs where a client’s net equity falls below 50% of the margin required to cover their positions.
  • Requiring providers to offer negative balance protection that limits a client’s losses to the funds in their CFD trading account.
  • Prohibiting promotional offers that give inducements to retail clients, although this does not include offering educational or research material or discounts to fees and costs.
     

ASIC expects that the new leverage ratios will reduce the size and speed of retail client losses and that changes to margin close-out and negative balance protections will standardise risk management features across CFD providers and protect clients by limiting their losses.

What does this mean for retail client access to OTC derivatives?

It is important to note that ASIC’s order has not restricted the ability of providers to offer CFDs or suggested that they are inherently unsuitable for retail clients. However, the extensive consultation that ASIC has entered into on CFDs (and the ongoing consultation on binary options), as well as recent fines for organisations who have targeted OTC derivatives at vulnerable customers, suggests that the regulator views this as an area that requires ongoing attention.

The upcoming Design and Distribution Obligations (DDO) will place further emphasis on the offering of products (including derivatives) that meet the objectives, financial situation and needs of retail clients. Organisations should be reviewing their product governance frameworks and distribution practices to determine whether they are fit for purpose and that products have appropriate features and are targeted at clients they are suitable for.

A copy of ASIC’s product intervention order can be found here.

Visit our DDO homepage.

More about our authors

Rosalyn Teskey

Rosalyn Teskey

Partner, Audit & Assurance

Rosalyn is a partner in Deloitte's Melbourne office in the Governance, Regulation and Conduct practice. She specialises in supporting firms to design and assess frameworks to treat customers fairly, including the development of conduct, product governance, sales practices and complaints handling frameworks.

Simon Thorpe

Simon Thorpe

Director, Audit & Assurance

Simon is a Director in Deloitte’s Investment, Wealth and Treasury team. He specializes in working with clients to implement regulatory change, develop risk management frameworks and improve the efficiency and effectiveness of Compliance functions.