ASIC proposes CFDs restrictions and Binary Options Ban

The consultation paper highlights AISC's concern that the issue of OTC binary options and CFDs to retail clients in Australia has resulted in significant financial losses.

August 22, 2019 | AtoZ Markets - The Australian Securities and Investments Commission (ASIC) is planning to restrict the sale of binary options, which often sold through offshore forex brokers under low governance jurisdictions such as Belize and the Seychelles. The regulatory watchdog is also looking to restrict the sale of Contracts for Difference (CFDs) to retail clients.

ASIC concerns for highly speculative Binary Option growth  

According to the consultation paper which was released on Thursday by AISC says that "significant detriment to retail clients resulting from over-the-counter (OTC) binary options and CFDs".

Such kind of restrictions by ASIC might have an impact on forex brokers operating from Australia. The Binary options allow traders to bet on the price of an asset or a particular currency or commodity over short time-frames. This option helps the traders to actually buy or sell the underlying asset, currency or commodity, which will not be possible after the ban.

A CFD is a contract on the difference between the opening and closing price of an asset, for example, the movement in a share price of a listed company or currency fluctuations.

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An ASIC review found that in 2018 alone, 80% of the forex traders who traded binary options lost money while 72% who traded CFDs lost money. AISC thus found that the average annual income of a CFD or binary options trader in Australia is $37,000.

ASIC senior executive leader of market supervision, Calissa Aldridge quoted that "We've seen really aggressive marketing tactics and incentives such as non-cash offers and gifts." She also mentioned that the issuers had spent $131 mln on advertising while providers paid a further $280 million to introducers.

She also found that along with traditional marketing like newspapers or boards at train stations brokers are also marketing through online dating sites. Due to such cases, ASIC had concerns that binary options and CFDs were causing significant harm to the traders.

In regard to binary options, Aldridge said: "We don't see a legitimate service. In our mind, it's a gambling product."

As per ASIC, the Australian market for binary options and CFDs is growing at a very pace, with the number of clients more than doubling in the past two years to one million clients. Most importantly, 99% of the retail clients and the majority are offshore based traders.

Moreover, licensed issuers of binary options and CFDs conducted 675 mln trades with clients last year and earlier this year held $2.9 billion of client money for trading.

New proposal for CFDs and OTC Binary Options

A review by ASIC found that during 2018, the gross trading revenue for binary options in Australia was $490 million and for CFDs $1.5 billion. Also said that revenue could largely be attributed to a blend of net client losses and fees and costs charged to clients.

Over the same time, CFD issuers automatically closed out 9.3 million client position after a margin call and over 41,000 clients' CFD trading accounts went into a negative balance.

ASIC plans to ban the issue and distribution of over the counter binary options to retail clients and place new restrictions on the sale of over the counter CFDs to retail clients. The planned ban for CFDs includes magnificent leverage limits, regulating how CFD margin calls are handled, and protecting retail clients against the risk of losing money as well as enhancing transparency.

Greg Yanco, ASIC executive director markets quoted that: “This is a problem with the product design. There is an industry code that is being put together, but we’ve had a look at that and we don’t think it goes far enough.”

ASIC expected significant pushback from the industry, particularly issuers of CFDs who he said would argue that they are good providers and there was an industry code in place.

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