The Australian Securities and Investments Commission (ASIC) announced new restrictions on the sale of contracts for difference (CFD) products to retail clients. The regulator cites concerns related to investor protection for this move.
What are the new rules?
According to the new rules, all regulated brokers in Australia now have to provide negative account protection to the users. This ensures that the customers do not lose more than what they have staked. It could also be useful in avoiding the repeat of the Swiss Franc collapse of 2015. The rules have also forbidden bonuses and other incentives to users, in both monetary and non-monetary forms. These incentives could have led to over-trading in the past few years.
However, the biggest blow to the brokers comes in the form of limited leverage rules. The maximum leverage they can now offer is 30:1.
The regulator has decided the maximum leverage for each asset class, of which the highest is for major currency pairs at 30:1. For non-major currencies, major indices, and gold, the leverage has been limited to 20:1 while for commodities (other than gold) and other non-major equity indices, the leverage can be a maximum of 10:1.
For individual equities and other reference values, the leverage will be limited to 5:1 while for cryptocurrencies, the leverage is only 2:1.
New product intervention methods
The ASIC talked about its new product intervention methods in a report published last year. Its measures were specifically targeted at binary options and CFDs. Starting April 2019, the ASIC has powers to intervene with products when it demands that it could cause significant harm to the consumer. The regulator has proposed to ban binary options completely and put strict leverage restrictions for CFDs.
With the new regulations in place, the ASIC guidelines are now in sync with the measures introduced by the European ESMA. However, ASIC said that it does not require issuer-specific risk warnings like the ESMA. In Europe, CFDs come with standardized risk warnings which includes a percentage of losses on the retail investor accounts of the CFD provider.