Australian regulator set to follow ESMA lead

Australian financial regulator, ASIC, has released a consultation paper setting out proposals to use its product intervention power to address significant detriment to retail clients resulting from over-the-counter (OTC) binary options and CFDs.

The consultation paper follows on from the ESMA regulations put in force in 2018, provides a snapshot of the binary options and CFD market and describes the harm to consumers ASIC has observed, outlining their proposed product intervention orders.

• ESMA warns CFD brokers

The Australian market for binary options and CFDs is growing rapidly, with the number of clients more than doubling in the past two years to one million clients (99% are retail clients and the majority are based offshore). Licensed issuers of these products conducted 675 million trades with clients last year and earlier this year held $2.9 billion of client money for trading.

ASIC is concerned that retail investors have suffered, and are likely in future to suffer, significant detriment from binary options and CFDs.

2018 data

• 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 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.

ASIC proposes to:

• ban the issue and distribution of OTC binary options to retail clients, and
• impose conditions on the issue and distribution of OTC CFDs to retail clients.

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.

‘A complete ban would prevent retail clients from losing money trading binary options. We believe binary options provide no meaningful investment or economic use, and have product characteristics similar to gambling products,’ Commissioner Armour said.

ASIC’s proposed restrictions on the offer of CFDs to retail clients include:

• imposing leverage limits, which are set out in Section F of CP 322
• implementing a standardised approach to automatic close-outs of client’s CFD positions in margin call
• protecting retail clients against the risk of negative CFD trading account balances
• prohibiting certain trading inducements, and
• enhancing transparency of CFD pricing, execution, costs and risks.

ASIC’s proposals are broadly consistent with measures implemented in many overseas markets.

ASIC seeks the feedback on its proposed product intervention orders by 1 October 2019.

Public consultation is required under the product intervention power provided to ASIC in April 2019, and any decision to make an order must be published in a public notice on ASIC’s website.

• Download the consultation paper here