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ASIC’s Restrictions for CFD and Forex Brokers – What’s Next?

CFD and Forex Brokers

It has been more than two years since ESMA tightened regulations on CFD brokers in Europe. Leverage restrictions, the banning of binary options, a prohibition on promotional offers and the standardisation of margin close-outs have since contributed to a less profitable but more responsible trading environment across the region. 

While some brokers welcomed the new restrictions in Europe, many had a negative outlook. The regulations have certainly diminished the overall size of the market, with many brokerages closing their European retail operations or shutting down entirely as profits shrank. Now, regulators may argue that this is not a bad thing in their view; it has long been suspected that regulators in the US, Europe and Australia view CFD brokers as a barely tolerated evil. 

Many of those brokers affected have since looked to less restrictive markets to make up the shortfall in profits.  Booming CFD growth in Asia, Africa, and Latin America has been the result. One could argue that by applying tight restrictions unilaterally, regulators in the developed world have moved their “problem” with CFDs to less developed markets with less capable regulators.

Whatever the case, after a consultation period (that was also used as an opportunity to castigate the industry), ASIC is now set to follow ESMA’s lead and apply tight restrictions on the provision of CFDs. Starting on 29th March, these changes will bring the Australian regulatory environment in line with European markets. Indeed, many of the changes are carbon-copies of ESMA’s 2018 controls. 

Headline restrictions include a leverage ratio limit of 30:1 on major currency pairs and 2:1 on crypto assets. While the crypto limit may seem overly restrictive, it is important to bear in mind that the UK’s Financial Conduct Authority recently banned crypto CFDs completely – a measure that many observers expect to see copied in other jurisdictions sooner rather than later.

Additional changes include enforced negative balance protection for all traders and the prohibition on the use of promotions and bonuses. 

It has already been reputationally hazardous for ASIC-regulated Forex brokers to enforce the payment of a negative balance for some time, so this change will not make much of a difference. But the ban on bonuses and promotions will certainly have a dampening effect on the onboarding of new clients.

With little choice in the matter, brokers have quickly fallen in line and pledged to seamlessly implement these limits for their Australian clients. Though many brokers have publicly supported the new regulations, many are privately nervous about the effect on trading volumes. Following the implementation of the new ESMA restrictions, brokers reported a 20-30% drop in transactions – a similar decline in Australia could be catastrophic for many smaller brokers. 

Interestingly, binary options trading will remain legal in Australia, despite being prohibited in most mature markets. ASIC is understood to want to ban the practice, but the decision has to be made at a government level and is expected to occur down the line. 

Many brokers have been using ASIC regulated companies to sell services and products in Asia Pacific and beyond for some time, though this is now unlikely to continue. Expect to see the trend of brokers setting up offshore shops in Vanuatu and the like to be boosted, though how customers will respond remains to be seen. 

Overall, while these changes will bring ASIC into line with ESMA and the FCA, it is unlikely that we are seeing the end of the regulatory assault on CFD trading. The market chaos blamed on WallStreetBets and the new breed of no-commission brokers has only further intensified an already reactionary environment; ASIC and other regulators will be already looking to further clip the industry’s wings.

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