Australia financial regulator ASIC, as it recently hinted it would, has announced that it is proposing to extend the “temporary” CFD brokerage and trading rules in Australia to 2031, effectively making them permanent.
ASIC announced the new rules in October 2020 as a temporary measure, with its product intervention order set to expire on 23 May 2022 unless extended. The rules became effective earlier this year on March 29, 2021.
The key facets of the rules are:
- maximum leverage of 30x on CFDs, with that amount reserved only for Forex major pairs; lower leverage on other instruments, down to just 2x on crypto CFDs; and
- negative balance protection for retail CFD traders – i.e., you can’t lose more than you deposited with your broker.
The rules basically matched those which were put into place in the UK and Europe in mid 2018, although the UK has since gone further and banned crypto CFDs altogether.
Leading the regulator to its decision was a marked improvement in outcomes for retail clients trading FX and CFDs at Australia based Retail FX and CFD brokers after the new rules were enacted. During the product intervention order’s first three months of operation, ASIC said it observed significant improvements in key metrics and indicators of retail client detriment from CFD trading – mainly, reduced retail client losses.
Retail clients made net losses of $22 million from CFD trading after the rules were enacted, according to ASIC – a reduction of 94% as compared to the quarterly average of $372 million in the year prior to the product intervention order. There were 45% fewer loss-making retail client accounts compared with the quarterly average in the prior year, whereas the number of profit-making retail client accounts reduced by only 4% across the same period. Aggregate and average losses made by loss-making retail client accounts also decreased.
The proportion of profit-making and loss-making retail client accounts was evenly split at 50%, compared with a quarterly average of 36% profit making accounts and 64% loss-making accounts in the prior year. Margin close-outs, where a retail client’s CFD positions are closed before all or most of the client’s investment is lost, decreased by 85%. Negative balance instances reduced tenfold for retail clients.
By contrast, the proportion of profit-making and loss-making wholesale client accounts in the period remained relatively stable at 37% and 63% respectively. ASIC’s product intervention order does not apply to CFDs issued to wholesale clients.
ASIC added that it will continue to monitor and assess the performance of the CFD product intervention order during the consultation period, which ends on 29 November 2021.