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#1 27-11-2020 13:38:33

johnedward
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From: Paris - France
Registered: 21-12-2009
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Will hardening of currency and CFD rules affect Australia's brokers?

Will hardening of currency and CFD rules affect Australia's brokers and markets?


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With ASIC's introduction of stricter rules next year for forex and CFD trading, the Australian trading community is questioning whether traders will turn to less regulated offshore brokers or whether they will welcome these harsher restrictions.

Forex trading in Australia has been gaining popularity for years. Yet with the unprecedented chaos caused by the virus situation, retail trading accounts are being created 3 times more than in previous years.

Last year, ASIC announced that the financial authority was preparing to tighten CFD and forex regulation in order to tackle the large losses suffered by Australian traders. While many anticipated these changes would take effect earlier this year, it is speculated that the uncertainty and instability caused by the virus situation has caused ASIC to slow down. Yet unexpectedly on 24 October, the regulator said major changes in CFD and forex trading regulations will come into effect at the end of next March.

Many forex traders are speculating that this sudden announcement is due to the surge in interest in CFDs and forex trading since the onset of the virus situation. In March, at the height of the situation, Australian retail traders lost a staggering $430 million in one week, with more than 4,950 traders posting negative balances totaling -$3.9 million.

With the aim of reducing losses suffered by retail traders, several major changes to the forex trading rules will come into effect in March of next year. Following the European model, ASIC will require regulated brokers to apply leverage limits, increase investor protection and not use promotions to entice clients.

Change 1: Reduced maximum leverage

Currently, Aussie brokers can offer traders up to 500:1 leverage for major currency pairs. Leverage allows traders to take larger positions than they could otherwise, so the risk is greater as both profits and losses are magnified. Starting in 2021, ASIC-regulated brokers will be required to cap leverage at 30:1 for major currency pairs and 20:1 for minor and exotic currency pairs.

Change 2: Investor protection policies

Although some Aussie brokers offer negative balance protection as a risk management policy, it is currently not required by law. Following in the footsteps of the UK Financial Conduct Authority (FCA), all retail traders will be protected by negative balance protection as of March 2021. The risk management policy ensures that if traders suffer large losses, their trading accounts cannot be pushed into a negative balance that would make them beholden to their broker.

Change 3: Prohibited promotions

In order to curb brokers who encourage vulnerable people to open and fund trading accounts without being aware of the risks, ASIC will ban certain promotional tactics. Reduced fees and operations for high volume traders are acceptable, but brokers will not be able to offer freebies like "cash backs", account credits, signup bonuses, or referral rewards.

In the past, when major financial authorities such as ESMA or FCA announced stricter CFD and forex regulations, the trading community often speculated that most traders would turn to offshore brokers. which provide a more relaxed trading environment. Yet we have seen many traders in Europe, UK and now Australia rejoice in the strengthening of investor protection. When ESMA introduced similar regulatory changes 2 years ago, major UK brokers saw a mere 6.6% reduction in their net income due to stricter rules that lowered trading volumes.

Many ASIC-regulated brokers such as CMC Markets, IG and Plus500 have publicly welcomed the tightening of regulation in Australia, with Plus500 saying the changes are similar "in spirit and effect" to the ESMA regulation. As Australia's reputation for regulation aligns with that of major financial centers in Europe and the UK, most brokers don't believe there will be much of an overall impact.

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