The Australian Securities and Investments Commission is planning to use its new product intervention powers to deal with what is sees as “significant detriment to retail clients” in the market for contracts for difference and over-the-counter binary options.
ASIC issued a consultation paper last week, setting out its proposal to ban the issue of OTC binary options to retail clients and to impose conditions on the issue and distribution of OTC CFDs to retail clients.
Restrictions on CFD’s would include leverage limits, implementing a standardised approach to automatic close-outs of positions, a prohibition on trading inducements and enhaced transparency.
Under recent changes to the Corporations Act, ASIC has the power to make a product intervention when it is satisfied that a retail product is likely to result in significant detriment.
It can take a range of temporary actions including stop orders, banning a product or product feature, imposing sale restrictions and amending product information. The power covers financial and credit products.
The regulator says that one-third of the market-related complaints it has received this year are related to these two products, which it considers a disproportionately large share.
ASIC defines as CFD as a contract on the difference between the opening and closing price of an asset, allowing investor to speculate on the change in the value of an underlying asset.
CFDs can include currency pairs, and margin FX is the most commonly traded CFD in Australia. Other underlying assets include equity indices, single equities, commodities, cryptoassets, interest rate instruments, futures and options.
Profit or loss is the difference between the opening and closing values of the CFD position. These positions are typically leveraged.
Losses are not limited to the amount invested, so if the index goes in the wrong direction the investor can end up owing money to the CFD issuer.
ASIC’s view is that high leverage ratios are unsuitable for retail clients. An investor with a CFD contract that has a leverage ratio of 500:1 and investing $10,000 has a total market exposure of $5 million.
ASIC is proposing that at the time of issue the leverage on a CFD contract would be between 2:1 and 20:1, depending on the underlying security. In other markets leverage limits on CFD contracts are common.
A binary option is an “all or nothing” bet on the outcome of an event, allowing investors to bet on the occurrence of a specified event in a defined timeframe. This can include a bet on movements in the price of a financial product or an economic event, such as a central bank interest rate decision.
ASIC’s view is that binary options are unsuitable as an investment product for retail clients.
The regulator says the market for these investments is growing rapidly, with the number of clients doubling over the past two years. The great majority are retail clients. Licensed issuers of these products hold around $3 billion of client money for trading.
Issuers received gross trading revenue of $499 million from binary options and $1.5 billion from CFDs last year, which is a mix of fees and client losses.
ASIC says more than 40,000 CFD client accounts went into negative balance, owing CFD issuers around $33 million.
By ASIC’s estimates, 80 per cent of investors who trade binary options lose money and 72 per cent of CFD traders lose money.
ASIC commissioner Cathie Armour says: “We believe binary options provide no meaningful investment or economic use and have product characteristics similar to gambling products.
“Unlike binary options, CFDs can serve legitimate trading, investment and hedging purposes. However, it is concerning that most retail clients lose money trading CFDs, often due to excessive leverage.
“Unclear or confusing presentation of information to retail clients about the risks, pricing and costs of CFD trading can lead to the sale of CFDs that are misaligned with clients’ needs, expectations and understanding.”
ASIC says similar measures to the ones it is proposing have been introduced in Europe and North America.