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ASIC issued the following media release regarding Contracts for Difference (CFDs):

ASIC has made a product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients. ASIC found that during a volatile five-week period in March and April 2020, the retail clients of a sample of 13 CFD issuers made a net loss of more than $774 million.

During this period:

  • over 1.1 million CFD positions were terminated under margin close-out arrangements (compared with 9.3 million over the full year of 2018)
  • more than 15,000 retail client CFD trading accounts fell into negative balance owing a total of $10.9 million (compared with 41,000 accounts owing $33 million over the full year of 2018). Some debts were forgiven.

ASIC Commissioner Cathie Armour said, ‘Heavy losses sustained by retail clients trading in highly leveraged CFDs and ongoing market volatility during the COVID-19 pandemic highlight the need for stronger CFD protections in the product intervention order.’

  • restrict CFD leverage offered to retail clients to a maximum ratio of:
    • 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
    • 5:1 for CFDs referencing shares or other assets
  • standardise CFD issuers’ margin close-out arrangements that act as a circuit breaker to close-out one or more a retail client’s CFD positions before all or most of the client’s investment is lost
  • protect against negative account balances by limiting a retail client’s CFD losses to the funds in their CFD trading account, and
  • prohibit giving or offering certain inducements to retail clients (for example, offering trading credits and rebates or ‘free’ gifts like iPads).

‘The leverage ratio limits in the order aim to reduce the size and speed of retail clients’ losses by reducing CFD exposure and sensitivity to market volatility. This follows similar measures introduced in major overseas markets, including the United Kingdom and European Union’ Commissioner Armour said.

A link to ASIC’s release regarding the new product intervention order appears below:
https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-254mr-asic-product-intervention-order-strengthens-cfd-protections/