ASIC has announced that it will be implementing stricter restrictions on the distribution of contracts for difference (CFDs) to retail clients. This move comes in response to the heavy losses sustained by traders when trading highly leveraged CFDs. In this article, we will explore the changes that will be introduced and how they will affect traders.
What Are The Changes?
Starting from the 29th of March 2021, the Australian Securities and Investments Commission (ASIC) will enforce a product intervention order that will limit CFD leverage to the following maximum ratios:
- 1:30 on major currency pairs
- 1:20 on minor currency pairs, gold or major stock market indices
- 1:10 on commodities (other than gold) or minor stock market indices
- 1:5 on shares or other assets
- 1:2 on crypto-assets
The order will also:
- Standardize margin close-out ratios to prevent clients from losing all or most of their investment
- Provide negative balance protection by limiting client losses to the funds in their account
- Prohibit offering certain incentives to retail clients, such as credits, rebates or ‘free’ gifts
Why Are The Changes Being Introduced?
In March and April 2020, retail client losses from a sample of 13 CFD brokers were reviewed over a five-week period. The changes are being introduced to reduce the likelihood of traders incurring heavy losses when trading highly leveraged CFDs.
ASIC found that these clients made a net loss of over $774 million. Indeed, currency and equity markets have been notably volatile since 2019, which in turn has dramatically increased both losses and profits for traders.
The new changes are designed to strengthen protections for retail clients, by reducing the size and speed of losses through the measures listed above. These measures are also similar to those already applied in major markets, such as the United Kingdom and European Union.
What Does This Mean For Traders?
Traders already using ASIC-regulated brokers don’t need to do anything, as there will not be any immediate changes to trading accounts. However, traders should be aware of the changes to margin rates for different asset classes, i.e. the decrease in leverage will mean higher minimum margin requirements from 29th March 2021:
- Major forex pairs – 3.33% (1:30)
- Minor forex pairs, gold and major indices – 5% (1:20)
- Commodities (other than gold) and minor indices – 10% (1:10)
- Shares or other assets – 20% (1:5)
- Cryptocurrencies – 50% (1:2)
Brokers may have already notified clients of these changes, but you can also contact customer support for further details. Note that these changes will only apply to retail clients and not to wholesale or professional clients. However, if you would like to know whether you qualify as a professional trader, you can get in touch with your broker.