ASIC’s Product Intervention Order for CFDs offered to retail clients

   

In August last year, the Australian Securities and Investments Commission (ASIC) released Consultation Paper 322 Product intervention: OTC binary options and CFDs (CP 322) to seek feedback on ASIC’s proposal to issue a product intervention order affecting contracts for difference (CFDs) offered to retail clients.

On 22 October 2020, ASIC registered ASIC Corporations (Product Intervention Order—Contracts for Difference) Instrument 2020/986 (Instrument) which imposes new conditions on persons that issue or engage in other dealing activities to retail clients in relation to CFDs.  The changes will come into effect from 29 March 2021.

Also, the Instrument requires CFD issuers to take reasonable steps to notify existing retail clients of the terms of the Instrument.

What is going to happen?

Leverage ratio limits

The Instrument imposes minimum initial margin requirements on CFDs issued to retail clients so that leverage ratios at the time of issue do not exceed:

  • • 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; and
  • • 5:1 for CFDs referencing shares or other assets.

Margin Close-Out Protection

The Instrument requires that the terms of a CFD offered to a retail client must provide that, if at any time the net equity of the client’s CFD trading account is less than 50% of the total initial margin or total margin required for all of their open CFD positions on that account (known as the aggregate close-out protection amount), the CFD issuer must (as soon as market conditions allow) close out one or more open CFD positions held by the retail client until the net equity of the retail client’s trading account is equal to or greater than the aggregate close-out protection amount for the remaining open CFD positions or all of the CFD positions permitted to be terminated under this condition have been terminated.

Negative Balance Protection

The Instrument also requires the terms of a CFD offered to a retail client must limit the retail client’s losses on CFD positions to the funds in that client’s CFD trading account, such that a client’s account will not be able to move into negative balance.

Prohibitions on Inducement

The Instrument prohibits a person from giving or offering a gift, discount, rebate, trading credit or reward to a retail client or prospective retail client as inducement to open or fund a CFD trading account or trade CFDs.

These prohibitions do not cover:

  1. 1. information services or educational or research tools, or
  2. 2. discounts of fees and costs that are offered to all retail clients and prospective retail clients, including volume-based discounts.

Notification requirements

The Instrument also imposes notification requirements on CFD issuers that have issued a CFD to a retail client in the 12 months before 23 November 2020 to take reasonable steps to notify each client of the terms of the Instrument as soon as practicable and in any case within 10 business days after 23 November 2020.

Further information about the ASIC’s Product Intervention Order

You can find a copy of the Instrument at  ASIC Corporations (Product Intervention Order—Contracts for Differences) Instrument 2020/986

Further information about ASIC’s Product Intervention Order can be found at:

ASIC media release (20-254MR);

Product Intervention order notice; and

Consultation Paper 322: Product intervention: OTC binary options and CFDs.

Please do not hesitate to contact us if you have any questions about ASIC’s Product Intervention Order.

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