In May, at the annual Australian Stockbrokers and Financial Advisors Conference, ASIC’s head of market supervision, Greg Yanco, made it clear that regulation will move towards limiting the amount of leverage currently offered to investors and traders using contract for difference (CFD) and margin foreign exchange (FX) products. This approach may be met with some resistance from industry participants, but ASIC’s move is a fair and prudent reaction to the risks inherent in the extremely high levels of leverage that Australian investors and traders can access.
Leveraged financial instruments such as CFDs and margin FX are valuable instruments for traders and investors looking to generate superior portfolio returns. By using these products, investors have the ability to trade a number of asset classes across multiple time horizons, thereby allowing them to invest at any point in the global macro cycle. However, it is incumbent on the issuers of these leveraged products to ensure that clients are not taking positions that could potentially deliver dire financial consequences should things go awry.
Our own quantitative research at Saxo Group has shown us that, on average, lower levels of leverage can result in better client outcomes over time. Not surprisingly, better results for our clients translate into stronger and longer-term relationships, which deliver a more sustainable business for us. A win/win for client and broker.
Not a product problem
It is important in this debate to not lose sight of the fact that this is a leverage level problem, not a product problem. Responsible caps on leverage, rather than an outright ban of these products, would be the best response.
Leveraged products are democratising investment vehicles, as they open the door to increased diversification and enhanced returns for clients with smaller account sizes. However, with too much leverage, the risks of trading can significantly outweigh the benefits as higher leverage levels increase the probability of an early stop out, thereby crystallising losses on positions that have moved against clients, albeit only by a small amount.
Admittedly for Saxo, we are less reliant on leverage than many other brokers in the market. Besides CFDs and margin FX, we also provide trading and investing opportunities in all major asset classes, including local and international shares, ETFs, bonds, futures and options.
We believe that running a client-focused, profitable business and being a responsible market participant are not mutually exclusive. For the industry to survive and grow over the long term, it should welcome a move away from competing on leverage levels and embrace competition on quality of platform, price, product and service.
Adam Smith, chief executive, Saxo Capital Markets Australia
