ASIC has used its newfound product intervention powers to ban the sale of “binary options” to retail investors as part of its crackdown on the $11.5 trillion over-the-counter (OTC) derivatives market.
April 1, 2021 | AtoZ Markets – The Australian Securities and Investments Commission (ASIC) on Thursday that it has decided to ban brokerage firms from allowing retail investors – those with less than $2.5 million in assets – to buy or trade the complex financial products.
The Australian regulator mentioned that the ban will come into effect on May 3, 2021.
Why ASIC Is Banning Binary Options For Retail Investors
Binary options are a risky form of derivatives which often contain an “all or nothing” structure that give investors a 50% chance of losing their entire investment amount and have short contract durations.
ASIC’s crackdown on the sector followed reviews in 2017 and 2019 that found about 80% of retail investors who traded binary options lost money.
Regular Australian investors lost about $490 million in 2018, leading ASIC to fire off some warnings shots, triggering a major reduction in the size of the market. Retail losses amounted to about $6.7 million in 2019.
“The product characteristics [of binary options] make them incompatible with investment or risk management use by retail clients,” said ASIC commissioner Cathie Armour.
“ASIC’s product intervention order will protect retail investors from these harmful products at a time of heightened vulnerability.”
The review found the products were suited to very short-term, speculative trading strategies, with the average contract duration at one firm a mere six minutes.
The ban will be in place for 18 months and then reviewed with a possible permanent extension.
As a reminder, British watchdog, the Financial Conduct Authority (FCA) also banned Binary options for retail investors in 2018 after thorough consultation on the decision for consumer protection purposes.
ASIC had previously flagged new regulations for the market, but an outright ban on retail participation is at the more extreme end of the options open to the regulator.
On Sunday, new caps were introduced for retail investors trading in contracts for difference (CFDs), another key product in the over-the-counter derivative market.
The changes placed limits on the amount of leverage – debt taken on by the trader to expand the size of an initial investment and maximise potential gains and losses – available to retail clients.
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