We’ve seen a lot of things change over the course of 2020. The COVID-19 pandemic inspired a lot of change in how many of us live and work, as well as how we shop, bank and invest.
One significant change which the forex industry endured in 2020 was the implementation of drastic product intervention measures applied by the Australian Securities and Exchange Commission (ASIC).
From the 29th of March 2021, ASIC-licensed CFD issuers, i.e. forex & CFD brokers, must restrict the amount of leverage which is offered to retail clients.
Under the new legislation, brokers may not provide retail traders with leverage greater than 1:30. Previously, there were no guidelines on how much leverage forex & CFD brokers may give to clients.
In most cases, brokers generally offered up to 1:500 leverage; some may have gone a bit further by offering as much as 1:1000.
The amount of leverage Australian brokers could offer was entirely at their discretion.
Although plans for the Australian regulator to introduce product intervention measures were well underway long before COVID-19, industry pundits expected the circumstances borne from the pandemic would have delayed the introduction of new measures.
However, evidence issued by ASIC suggests the pandemic fueled more risk to investors and therefore expedited the timeline.
In this article, we’ll explore the changes and potential impacts to retail investors, the origin story behind these changes, what industry insiders felt about the plans and how it may impact the industry going forward.
Article Key Points:
- ASIC imposed product intervention measures on FX & CFDs
- Old ASIC Rules Vs New (Chart)
- Top ASIC Regulated Brokers (Broker list)
- How Europe inspired ASIC product intervention measures
- Why ASIC took action against FX & CFDs
- How COVID-19 affected the regulation
ASIC imposed product intervention measures on FX & CFDs
According to the new product intervention measure, officially known as Instrument 2020/986, brokers must follow strict rules in respect of margin requirements.
ASIC-licensed brokers may not provide leverage greater than 30:1.
To put that into context, if you wanted to open a position of 1 Lot (100,000) USD/JPY, with a leverage ratio of 1:100, the amount of margin required to open the position would be just $200.
Under the new law, which stipulates retail traders may not be given leverage greater than 1:30, the amount of margin required to open that same position would be $3,333.33.
The direct impact of these changes requires larger capital requirements from retail traders.
Here is a comparison of what the new measures impose against what ASIC-regulated brokers typically offered previously.
Top ASIC Regulated Brokers
|Regulations||ASIC, FSA, CySEC|
|Account Base Currency||USD, AUD, EUR, GBP, CAD, JPY, NZD,CHF, SGD, HKD|
|Trading Platforms||Metatrader 4/5, cTrader, Webtrader, API Trading, MAM / PAMM|
|Broker Type||ECN, DMA|
|Min Deposit||$100.00 USD|
|Account Base Currency||AUD, CAD, CHF, EUR, GBP, HKD, CNY, NZD, SGD, USD|
|Trading Platforms||IRESS, Metatrader 4 and 5, MAM, PAMM|
|Account Base Currency||USD, AUD, CAD, SGD, GBP, EUR|
|Max Leverage||1:100 leverage and up to 1:200 (pending approval)|
|Trading Platforms||Metatrader 4|
How Europe inspired ASIC product intervention measures
The product intervention measures adopted by ASIC seem to echo changes applied earlier in Europe.
It all started at the beginning of 2018 when the Markets in Financial Instruments Directive (MiFID) II legislation came into effect on the 3rd of January.
MiFID was already the backbone of regulation of financial markets.
MiFID II introduced many new rules concerning almost every asset class, instrument and profession within the financial markets industry.
Notably, it gave National Competent Authorities (NCAs), which are statutory bodies responsible for regulating the financial services of a specific country, powerful product intervention measures.
Before any NCAs had the chance to flex their newly acquired product intervention measures, the European Securities & Markets Authority (ESMA), which is a supranational financial markets authority, proposed its own product intervention plans.
On the 18th of January, ESMA issued a ten-page consultation paper proposing many changes to how forex & CFDs may be sold in Europe.
Industry participants were given less than three weeks to respond.
Despite the short turnaround time, ESMA received feedback from almost 18,500 respondents.
However, by the 27th of March 2018, temporary product intervention measures were formally adopted and enforced throughout Europe.
Why ASIC took action against FX & CFDs
On the 22nd of August 2019, ASIC published Consultation Paper 322 (CP 322), it was a 70-page document which presented a lot of research from the Australian markets and comparisons of other regulatory authorities around the world.
Increasing growth of brokers in Australia
One of the first points raised in CP 322 was the rapid growth enjoyed by Australian brokers between 2017 & 2019, a period which followed the measures of reducing leverage for retail traders in Europe.
- The number of clients increased by 121% – from approximately 450,000 up to 1 million.
- The amount of client’s funds held by brokers increased by 45% – from $2 billion up to 2.9 billion.
- Notional trading volume increased by 100% – from $11 trillion up to $22 trillion.
- The number of transactions processed increased by 186% – from 236 million up to 675 million.
Concerns surrounding client’s demographics
In the consultation paper, ASIC noted that it was surprised at how few traders with accounts at Australian brokers actually belonged to Australians.
One metric which stood out was that 11% or 110,000 clients of Australian brokers were Europeans.
Concerns of regulatory arbitrage
The consultation paper prepared by ASIC covers at length, the different approaches other rules set by various regulators around the world and analyses the different methods taken and analyzed how Australia could apply them.
ASIC specifically noted that it believes regulatory arbitrage was the reason for substantial growth experienced by Australian forex & CFD brokers.
ASIC made the decision in 2020
Finally, after a drawn-out deliberation lasting longer than a year, on Friday the 23 October 2020, ASIC finally revealed its final decision and decided to dramatically alter how forex and CFD brokers licensed under ASIC may provide services to retail investors.
How COVID-19 affected the regulation
Although the writing was on the wall COVID-19, many industry participants still hoped the Australian regulator would not, as they see it, impoverish an industry that employs thousands of Australians and contributes hundreds of millions of dollars in annual tax revenue.
During the first half of 2020, the financial markets experienced volatility across all asset classes.
Gold hit an all-time high, oil futures traded at negative prices, the New York Stock Exchange hit circuit breakers multiple times in a single trading session, and daily FX trading volumes broke records.
Despite all the action in the markets, ASIC published a statement in May 2020 expressing concern over dramatic losses experienced by traders with Australian brokers.
The document titled retail investor trading during COVID-19 volatility highlighted alarming statistics that may have motivated the regulator to speed up its decision regarding proposed product intervention measures.
- The number of CFD transactions conducted in March 2020 exceeded 45 million in a single week, almost double an average week.
- 142,022 dormant retail trading accounts, which had not traded in more than six months, became active during March 2020.
- 140,241 new retail trading accounts began trading during march 2020.
- In a single week, between the 16th to 22nd of March 2020, retail traders from just twelve Australian brokers experienced losses of $428 million gross (or $234 million net).
How the industry perceived the rules imposed by ASIC
For many brokerage firms operating in Australia and traders of those companies, reducing leverage is a game-changer for the industry.
In total, ASIC received more than 400 responses to CP322.
One of the recurring points expressed by respondents was that it would lead to retail traders moving their accounts to less reputable offshore FX & CFD brokers who operate at a lower standard.
Much like how Australia saw a mass migration to from Europe, it’s expected that those same traders from Europe, as well as domestic Australian traders, will open accounts in another jurisdiction.
About This Article
Author: Roslan Skarsgard – Roslan has worked for numerous forex brokers and investment firms in London, Cyprus, Malta & Singapore in various sales, marketing and operations roles.
Reviewed & Edited by: Mark Prosz
Sources of information and credits for this post include: