ASIC is looking to place a ban on the sale of binary options and limit contracts for difference (CFDs), with both reported to make most of almost $2 billion in revenue from client losses last year.
Binary options are all-or-nothing bets on the outcome of an event and CFDs are contracts on the difference between the opening and closing price of an asset.
The corporate regulator released a consultation paper outlining proposals to use its newly gained product intervention power, with the concern that retail investors have suffered and likely to suffer significant detriment from over-the-counter (OTC) binary options and CFDs.
The paper, Product intervention: OTC binary options and CFDs, was released alongside a report of the binary options and CFD market, which ASIC titled Consumer harm from OTC binary options and CFDs.
The Australian market for binary options and CFDs is growing rapidly, the regulator reported, with the number of clients more than doubling in the last two years to one million. Of those clients, 99 per cent were retail customers and the majority were based offshore.
Licensed issuers of the products conducted 675 million trades with clients last year and earlier in 2019 held $2.9 billion of client money for trading.
During 2018, licensed issuers received gross trading revenue of $490 million from binary options and $1.5 billion from CFDs – which can largely be attributed to a combination of net client losses and fees and costs charged to clients, ASIC said.
Further, more than 41,000 clients’ CFD trading accounts went into negative balance, totalling -$33 million that clients owed to the CFD issuer.
An earlier ASIC review in 2017 found that 80 per cent of clients who trade binary options lose money, 72 per cent of clients who trade CFDs lose money and 63 per cent who trade CFD over currency pairs suffered losses.
The proposed restrictions on CFDs include imposing leverage limits, implementing a standardised approach to automatic close-outs of client’s CFD positions in margin call, protecting retail clients against the risk of negative CFD trading account balances, prohibiting certain trading inducements and enhancing transparency of CFD pricing, execution, costs and risks.
ASIC said its proposals are broadly in line with measures implemented in overseas markets.
ASIC commissioner Cathie Armour said for many years ASIC has taken strong action to protect consumers of binary options and CFDs, concerned consumers continue to suffer harm from the products.
“A complete ban would prevent retail clients from losing money trading binary options,” Ms Armour said.
“We believe binary options provide no meaningful investment or economic use, and have product characteristics similar to gambling products.”
The regulator added complex product features, such as the high leverage offered in CFDs, as high as 5,000 to one for foreign exchange CFDs, or the high likelihood of cumulative losses inherent in binary options, have contributed to retail clients’ financial losses and can often be misaligned with their needs, expectations and understanding.
The regulator is seeking feedback on the proposed product intervention orders by 1 October.
In the past, the regulator has taken enforcement action to address instances of misconduct, issued public warnings, conducted surveillance projects and thematic review, and given retail client education campaigns and guidance for issuers.
It has also adopted stronger regulations such as the ASIC Client Money Reporting Rules which commenced in April last year.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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