The Australian Securities and Investments Commission, ASIC, in August, 2021 released a four-year corporate plan for 2021-2025 outlining priorities for controlling the proliferation of retail OTC derivatives, especially CFDs and binary options.
The regulator has identified three key measures as part of its intervention in the retail OTC derivatives industry. First, it will monitor compliance with the requirements for contracts for difference and binary options.
Australia continues to attract Forex and CFD brokers. However, the ASIC has added many new regulatory requirements in recent months. In particular, the regulator followed in the footsteps of the European Commission for Securities and Markets ESMA and lowered the maximum leverage from 1:500 to 1:30.
The case of leverage is especially important. As you know it is not always beneficial to traders. While you can execute large trades in some cases the leverage can act as a double-edged sword and you are at risk of losing your money. A lot of Forex brokers have a tremendous rate of leverage - 1:1000 even. Lowering the leverage would be a good thing for traders.
In addition, in April, the Australian regulator imposed an 18-month ban on retail sales and distribution of binary options. It is possible that in the future the regulator will extend the term of the ban. According to the regulator, it was necessary to assess the effectiveness of the regulations in terms of harm reduction and the need to extend the duration of the bans.
It is still unclear how fast the regulations will affect various Forex brokers that are regulated by the ASIC. Even though some brokers are not licensed by the Australian regulator, still some of them are operating in the country.
A famous broker XM is an example of that, which is widely popular in Australia. You can find out more about this broker in this XM review available on a prominent website. Taking into account the regulations in this region, the broker will be forced to incorporate some changes as well.
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In addition, ASIC closely monitors the financial services industry and actively takes action against any regulatory violations. According to the regulator, it is necessary to take measures, including law enforcement, where justified, to eliminate misconduct - the third step indicates the willingness of the regulator to strengthen market supervision.
The regulator stressed that it will use regulatory tools to oversee and punish violators. The agency also focuses on the booming cryptocurrency industry. In this regard, it issued a warning against unlicensed crypto exchanges offering services to Australian traders.
Joe Longo who is the chairman of the ASIC, noted that the company will continue to seize the opportunities to support businesses through better regulation. In addition, they will also protect the interests of investors and remain vigilant.
The new rules bring the ASIC regulator's requirements in line with the rules set in Europe.
The Australian Securities and Investments Commission, ASIC, has officially announced restrictions on the sale of CFDs for difference to retail clients, saying it remains concerned about investor protection.
Negative Balance Protection
The rules also instruct Forex brokers to introduce negative balance protection. This measure ensures that customers do not lose more than they deposited into their account. Finally, the rules prohibit bonuses and other incentives, both monetary and non-monetary, that have provoked increased activity by traders in this segment.
For Forex brokers, the biggest blow, of course, was the regulator's decision to limit the amount of leverage they can offer their clients. Regulated firms are forced to limit the leverage they offer clients to 1:30.
However, the value can change depending on the volatility of a particular asset class:
- 1:30 for major currency pairs;
- 1:20 for non-major currency pairs, gold and major indices;
- 1:10 for commodities other than gold and non-major equity indices;
- 1: 5 for individual stocks and other reference values; and
- 1: 2 for cryptocurrencies.
Banning Binary Options
We should also remember that the Australian regulator in 2020 proposed to completely ban binary options in the country and introduce leverage limits for CFD products.
As we already stated above, the new rules effectively bring ASIC requirements in line with those set in Europe by ESMA, which has also banned the sale of binary options and limited leverage on CFDs.
But unlike ESMA, the ASIC said it would not require issuer-specific risk warnings or other terms based on disclosure, as originally suggested. In Europe, brokers are required to issue a standardized risk warning that states the percentage of losses in retail investor accounts.
The Australian financial regulator recently dealt a heavy blow to risk-taking in the retail segment. However, industry players claim they are already adhering to most of the new rules.
The Commission has been preparing to tighten since it was revealed that 80% of binary options traders and 72% of traders in the CFD market are losing money. According to ASIC data, retail traders lost almost $ 490 million and $ 1.5 billion a year trading binary options and CFDs, respectively.
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However, the new requirements, which include leverage limits, margin call closing rules and negative balance protection, are expected to affect Australian clients' interest in local Forex brokers mostly.