2021 ASIC Forex Trading (CFD) Changes

Why Is ASIC Imposing Tougher Regulation?

When trading forex and other CFDs, investors are exposing themselves to unpredictable markets and volatile assets. As an investment activity, CFD trading is considered very high-risk. This month, the country’s financial authority, the Australian Securities and Investments Commission (ASIC) is implementing tougher regulation to combat the high percentage of retail traders losing money.

An ASIC Nov 2018 report showed:

• 80% of binary options traders lose money
• 72% of CFD traders lose money
• 63% of Margin FX lose money

COVID-19 and Online Trading

In May 2020, ASIC released a report explaining how the COVID-19 global pandemic has affected financial markets and retail trading.

From 24 Nov to 3 Nov 2020, ASIC found that Australian retail brokers were turning over twice as much as the six months prior. During the peak of the pandemic, retail brokers’ average daily turnover increased to $3.3 billion, from $1.6 billion.

Two factors contributing to the spike in trading activity include:

1. New accounts were being created approximately 3.4 times more than before the pandemic
2. ASIC identified 142,022 dormant accounts that entered the market again during the peak of the pandemic, accounting for 21.63% of all active traders.

In the report, ASIC highlighted how the COVID-19 induced volatility has magnified the high risk of losing money when trading with high leverage. From 16 to 22 Nov 2020, retail CFD and forex traders lost a staggering $428 million gross.

The financial authority found that the increased volatility was resulting in a higher incidence of slippage and gapping events, causing a number of traders to end up with negative trading account balances. In the same week of Nov 2020, 5,488 Australian retail traders went into a negative balance, amounting to -$4 million.

Due to the unprecedented nature of COVID-19 and the volatility and uncertainty it is causing, many forex brokers forgave a portion or all of the negative balances owed to them.

Lastly, the report found that many trading balances were being eroded by costly overnight funding costs (swap rates). For example, oil CFDs swap rates had increased to up to 220% pa.

Amid the extreme volatility from 16 Nov to 19 Nov 2020, ASIC determined that between 56.9% and 63.2% of retail traders were losing money. Over the five-week period, retail traders signed up to Australian brokers lost a total of $774 million.

Australian traders are not the only country that sees such high rates of retail traders losing money. Similarly to Australia, between 62% and 77% of retail investors in the United Kingdom lose money when trading CFDs with UK Brokers.

Below outline the changes to CFD and forex trading regulation and the impact on the industry. The changes come into effect on the 29 Nov 2021.

Major Changes to CFD and Forex Trading Regulation in Australia

The Australian Securities and Investments Commission (ASIC) announced on the 23 November 2020 that they are introducing 3 major changes to Australia’s CFD and forex trading rules. Going forwards, ASIC regulated brokers are required to enforce stricter rules for retail traders, including:

1. Reduced maximum leverage
2. Increased trader protection
3. No promotional inducements 

Change 1 – Reduced Maximum Leverage

ASIC believes the leverage previously available for retail CFD and forex trading was too high, resulting in individuals being exposed to unsuitably high risk. ASIC decided on a huge reduction in the maximum leverage that brokers can offer retail traders, down to 30:1 from 500:1.

South Africa (FSCA) is the only well known regulated market where brokers offer higher leverage than Australia (ASIC).

Announcement 1 – ASIC Restricts Forex Trading Leverage to 30:1

ASIC has placed leverage caps of 30:1 for major currency pairs and 20:1 for exotic and minor currency pairs. This is a 94% reduction from the previous levels offered by Australian forex brokers such as Pepperstone.

Other leverage restrictions include:

• 20:1 for gold and major stock exchange index CFDs
• 10:1 for commodity trading (non-gold) and minor stock exchange index CFDs
• 5:1 for other assets and referencing share CFDs
• 2:1 for crypto CFD trading

ASIC definition of a major currency pair includes any fx pair that comprises any two of the following currencies: AUD, GBP, CAD, EUR, JPY, CHF and USD.

Major stock exchanges include S&P 500, S&P/ASX200, NASDAQ 100, NASDAQ Composite, Nikkei Stock Average, Dow Jones Industrial Average, DAX, CAC 40, FTSE 100 and EURO STOXX 50.

How Will This Impact The Industry?

Reducing leverage will reduce the risks associated with trading, making it harder to make large profits and losses. This will help protect traders, but some individuals who require high leverage (such as automation traders) may choose brokers regulated overseas, or even unregulated brokers.

Offshore traders make up 80% of Australia’s trading volume in retail CFDs, and they are more likely to choose a broker that’s not regulated by ASIC. When the FCA introduced leverage caps to the UK (similar levels to the ASIC January announcement), local brokers saw a 6.7% decline in net income.

Summary Of Leverage Changes

The leverage drops of over 90% will lead to:

• A reduction in risk when trading CFDs
• Certain traders choosing overseas broker (who offer higher levels)
• Reduced income for Australian brokers

Change 2 – Trader Protection

ASIC has announced stricter trader protection regulations. At present, ASIC requires brokers to separate all clients’ funds from company funds in segregated bank accounts. This month brokers will be obligated to follow additional investor protection rules that are common in areas such as Europe.

Current Investor Protection by Country

Below compares the main forms of investor protection required by different financial authorities around the world.

On the 23rd of January, ASIC announced a standardised CFD margin close-out arrangement that requires brokers to close out all of a traders’ open positions, prior to them losing all their money. Additionally, all Australian brokers will need to protect their customers against negative account balances, know has negative balance protection (NBP).

Going forwards, Australian brokers will be required to provide three key investor protection policies to all retail traders:

• Close-Out Margins
• Negative Balance Protection
• Segregated Client Accounts (already in place)

How Will This Impact The Industry?

Increasing regulation around investor protection moves the risk of trading from the retail investor to the broker. CFD and forex brokers will either need to wear the costs or increase their fees.

Doing the latter may be difficult because of the high levels of competition and the threat of pushing traders to overseas brokers who offer higher leverage.

Change 3 – Joining Bonuses

Some brokers in Australia offer rewards for activities such as signing up to a broker, referring a friend, or trading high volumes.

ASIC is now prohibiting certain types of promotions or incentives. Brokers cannot induce customers to open or fund a trading account through rewards, as well as give or offer a gift, rebate or discount trading credit or balances.

Going words, ASIC will restrict brokers’ promotions to two forms:

1. Gifts and rewards of education or research tools and informational services.
2. Discounted fees and trading costs, i.e. discounts for high-volume traders.

Incentives Offered by Australian Brokers

The below table compares incentives offered by Australian brokers in Nov 2020.

An example of an incentive targeting prospective clients is City Index’s sign up bonus. The promotion does not explain that to receive the $1,000 bonus it requires new account holders to deposit a minimum of $7,500 along with placing 12 trades with the face value of either:

• $31.2 million in Forex, or
• $450,000 in Equity CFDs, or
• $2.3 million in all other CFDs

Why This Is An Issue

Free gifts, spread rebates, and bonus credits can attract vulnerable retail investors that do not fully comprehend the high-risk nature of CFD trading.

With nearly a third of Australian CFD traders earning less than $37,000 per year and a 40% increase in brokers marketing budgets between 2017 and 2018, ASIC believes that brokers are targeting inappropriate audiences that may not be aware of the high risk of losing money when trading CFDs.

What Changes Did ASIC Announce?

ASIC has banned forex (CFD) brokers from giving any bonuses or inducements to retail traders. This includes offers such as free iPads to bonus credits, as was the case with City Index. This is in line with regulation across Europe.

Change That Didn’t Occur – 1) Advertising Restrictions

ASIC believes that Australian brokers’ current marketing practices are aggressive and lack transparency. Research conducted by the financial authority found that advertising materials produced by certain brokers were misleading and failed to target a specific target market. Instead, adverts targeted a broad audience that doesn’t necessarily suit the product’s risk profile.

eToro Advertising In Australia Example 1

eToro is the best example of a broker advertising OTC derivatives trading as an accessible, low-risk hobby. The YouTube ad below shows Alec Baldwin using sock puppets to explain the ease of trading with eToro. You can see the YouTube video here.

eToro Advertising In Australia Example 2

Another example of eToro advertising is via social media platforms such as Facebook, where adverts target millennials and novice traders. The eToro sponsored post below (a screenshot from 07/02/2020) uses cryptocurrency as the gateway to derivatives OTC trading.

Download the full-size eToro Facebook ad.

eToro Advertising In Australia Example 3

The last example is a banner advertising on Money Magazine on 03/04/2020.

View the full banner advertisement on Money Magazine here.

Why This Is An Issue

Similar to gambling pre-legislation changes, targeted advertising can lead to unsuitable traders signing up with brokers who don’t understand the risks. In regions such as the EU, heavy restrictions are in place to eliminate predatory marketing tactics.

ASIC Made No Announcement On Advertising/Promotions

While ASIC banned joining bonuses, it made no announcement on advertising restrictions. This is a key difference between the new rules coming into force in Australia compared to the current standard in Europe.

Change That Didn’t Occur – 2)  Risk Disclosure

ASIC considered increasing the risk warning requirements on all information provided by Australian brokers to retail investors. Yet, the regulator stated in its recent report that they found little evidence that risk warnings are effective, and are not introducing further warning and disclosure requirements.

Initially, ASIC proposed increased transparency surrounding charges such as overnight financing fees and commission costs.

Case Study – Pepperstone Website In the UK vs Australia

The UK has already implemented risk disclosure requirements for all FCA licensed brokers. Pepperstone displays risk disclosures on its United Kingdom site, but not the Australian website. You can see this disclosure outlined below.

View the high-resolution PNG homepages of Pepperstone:

• Pepperstone UK Website Screenshot
• Pepperstone Australia Website

What ASIC Decided

ASIC is not increasing risk warning and disclosure requirements. This may be a requirement long-term but will not come into force this month.