Contract for difference (CFD) providers have agreed to form an industry body after the collapse of a large United States-based company saw hundreds of millions of dollars worth of assets frozen in Australia and sparked closer regulatory scrutiny of the sector.
“This is our way of having a consistent voice for the CFD industry,” CMC Markets Australia and New Zealand head Louis Cooper said.
“We suffered from not having consistency across the group, as a group of competitors, and this has brought us all together as a unified voice.”
Six CFD companies – Capital CFDs, City Index, CMC Markets, GFT Forex, IG Markets and Saxo Capital Markets – have agreed to form the Australian CFD Forum.
Forum membership is open to any provider that agrees to comply with a set of 16 standards aimed at better protecting consumers by ensuring they understand the risks, as well as the potential returns, involved with CFDs.
Cooper said the Australian CFD Forum was about nine months in the making.
“This is something ASIC has directed us to pursue as an industry, that they did not feel we had a voice as an industry, and that they would like to see us self-regulate over and above legislation,” he said.
Cooper said the founding members of the forum, representing about 90 per cent of CFD accounts across Australia, wanted to convey that the vast majority of CFD providers were well governed and capitalised.
“We thought there was a sector of the industry that was giving the rest of the industry a bad name,” he said.
In late 2011, US-based MF Global collapsed, and investigators uncovered movement of more than US$100 billion in the lead-up to the debacle.
The Australian arm of the business oversaw $319 million in trades on behalf of about 13,000 clients.
Cooper said the issue of counter-party risk, which brought on MF Global’s demise, was key to the success of the CFD industry in Australia.
“This is a huge industry for CFDs and the industry as a whole. Certain providers allow the use of client monies to hedge positions they have with their prime broker,” he said.
“The forum’s best practice standards require all client monies to be held separately. Should any of the businesses go insolvent, client monies are segregated from any of the obligations the business is involved in.
“We think that is the minimum an investor should expect from a CFD provider. If they do not get that, they should not, from a counter-party risk perspective be dealing with that provider.”
He said disclosure and consumer education were also key elements of the forum’s code of standards, which aim to exceed ASIC guidelines.
