April 11, 2019, | AtoZ Markets – ASIC is worried that some AFS licensees may be soliciting clients located in China and Europe to open accounts with Australia’s brokers in an effort to avoid offering CFDs overseas intervention measures. Australian financial service (AFS) licensees that offer OTC derivatives to its retail investors located in some overseas jurisdictions may be providing unlicensed or unauthorized services.
ASIC warns forex brokers
AFS licensees are on notice that in addition to overseas consequences of breaches of overseas law, ASIC will consider whether breaching overseas law is consistent with obligations under Australian law to provide services efficiently. Also, ASIC will consider whether AFS licensee is making misleading statements about the scope or application or effect of an AFS license.
Commissioner Cathie Armour quotes that,
“AFS licensees offering OTC derivatives to overseas retail clients should, as a matter of priority, seek advice on the legality of their offerings to these clients. Any non-compliant activities should cease immediately and be notified to ASIC and the relevant overseas authorities.”
The Retail OTC derivatives are highly risky. Few regulators in many jurisdictions (such as Europe, Japan, North America, and China) have restricted or prohibited the provision to retail investors of certain OTC derivatives, such as binary options, margin foreign exchange and other contracts for difference (CFDs) to mitigate harm to retail investors.
Developments in China and Europe
Chinese authorities have informed ASIC that some of the online platforms are illegally engaged in forex margin trading activities. Specific legal provisions have been implemented in China providing that any unauthorized institution that conducts forex margin trading without approval in China shall be deemed to be in violation of the law. Moreover, it is also illegal for any client to entrust an unauthorized institution to conduct forex margin trading.
According to ASIC, authorities in China have advised that no institution or agency has the approval to carry out margin foreign exchange trading in China. AFS licensees with Chinese clients might be conducting unlicensed or illegal activities in China if they are providing margin foreign exchange products to retail clients in China.
In addition to that, temporary product intervention measures have recently been extended in Europe by the ESMA. Authorities in the UK and Germany have announced permanent measures. They include anti-avoidance provisions. On the other hand, ASIC is concerned that some OTC derivative issuers that hold AFS licenses may be marketing clients located in China and Europe to open accounts with Australian-based AFS licensees. By doing so it will avoid the overseas intervention measures.
Armour also said that:
“AFS licensees who break the law in overseas jurisdictions, or who mislead retail investors about their services undermine the integrity of the Australian licensing regime. ASIC will not tolerate that conduct.”
Consumers losing initial investment due to Binary options trading
Binary options are financial products largely used by retail consumers to speculate on an event. The potential outcome is binary, with consumers usually either losing the initial investment in full if their prediction is incorrect or receiving a fixed pay-out if they are correct.
Moreover, CFDs are leveraged financial products that consumers use to speculate on the rise and fall in prices of underlying assets, such as foreign exchange, shares and crypto assets.
As per the ASIC’s June 2018 report on improving practices in the retail OTC derivatives sector, highlights the concerns with this sector. There are very concerning practices with misleading marketing materials, unclear pricing methodologies, inadequate risk management practices, inadequate monitoring of counterparties and inappropriate referral arrangements. The report also shows that the majority of traders’ trading in these products is unprofitable.
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