ASIC’s Release of Product Intervention Surprises FX Industry

ASIC’s Release of Product Intervention Surprises FX Industry

On 23 October 2020, Australia’s corporate regulator (ASIC) released its final product intervention order on the retail OTC derivatives industry- causing shock waves in the FX industry

The move ended over 12 months of speculation and uncertainty, which started when ASIC released Consultation Paper 322. The paper proposed to use its Product Intervention Powers (PIP) in August 2019.

After its release, ASIC Chair and the deputy stood aside pending an investigation into an expense scandal – which is still spiralling a week later.

The intervention follows after the advice of an Australian Judiciary member in his judgment against AGM and a statement from Sharon Concisom, that a decision was necessary to protect retail clients. Sharon Concisom is the ASIC Executive Director of Enforcement.

Many business people held the view that the intervention would certainly occur but most likely be imposed later.

Proponents of this view believed that the effects of coronavirus on treasury coffers meant that the Australian government was not in a position to lose $400 million in direct tax revenue annually.

They were also not ready to lose billions in bank deposits, which they could lend to small businesses in the Australian economy. At the same time, hundreds of people are out of work in a once-in-a-century economic crisis where unemployment is high and increasing.

The Instrument is effective from 29 March 2021, imposing negative balance protection and leverage restrictions. It will standardize the margin close-out arrangements and prohibit inducements in the sale of CFDs.

Most impressive is the changes ASIC has made from the proposed intervention in the CP 322 and the released intervention.

What Else?

ASIC has scrapped off initially proposed four conditions without much explanation other than reducing ‘high costs.’  All related to disclosure.

Condition 5 prescribed CFD issuers to provide a prominent risk warning to retail clients. It discloses the percentage of the CFD issuer’s retail clients CFD trading accounts that make a loss over 12 months.

The industry generally accepted the recommendation even though they were unlikely to have any consumer decision making.

Risk warnings could be useful in advertising where loss ratios are superior to competitors. However, European brokers have been operating with a version of the requirement for several years now. It’s therefore unclear ASIC abandoned it.

ASIC also omitted conditions 6 and 7.

The conditions that required real-time disclosure of total position size and overnight funding costs were most likely excluded. 

They required the CFD issuer to display the information on their proprietary trading platforms. This resulted in prejudicing them compared to most brokers who use third-party MetaQuotes, c-Trader, and IRESS platforms.

The ASIC also excluded condition 8, which authorized CFD issuers to maintain transparent pricing and execution.

Best execution requirements have their benefits but have many detractors of DTS 27.28 in the regulatory world. ESMA is questioning its efficacy and whether the resources they would need are proportional to its benefit to consumers.

Therefore, you’ll understand to see ASIC drop the requirement given it tends to follow the European approach instead of lead.

ASIC’s original proposal did not break currency pairs CFDs and CFDs reference stock markets indices into major and minor-  an approach ESMA takes.

In ASIC’s first iteration, all currency pairs had a leverage cap of 20:1 imposed. But the stock market indices underlying instruments were capped at a leverage of 15:1.

Minor stock indices CFDs have a leverage cap of 10:1.

Other leverage limits remained unchanged from the first proposed in August 2019. 

Australian brokers will be busy updating their compliance and operational processes in the next few months.

The Australian government has significantly limited Australians’ ability to travel to within their state, as CFD and margin FX industry participants are now more chained to their desks.