ASIC (Australian Securities and Investments Commission) has issued a warning to CFD (Contracts for Difference) providers, urging them to stop offering illegal “margin discounts” to retail clients. This practice, where opposing long and short contracts are discounted, is against the rules set by ASIC under the CFD Product Intervention Order (PIO) 2020/986.
What Does the CFD PIO Say?
The CFD PIO, which came into effect in October 2020, sets strict conditions for CFD issuers providing services to retail clients. The key points to note:
- Initial Margin Requirement (Section 7(2)):
- CFD issuers must require an initial margin ranging from 3.33% to 50%, depending on the underlying asset.
- CFD issuers are not allowed to offset the value of opposing positions when calculating this margin for retail clients.
- Margin Close-Out Protection (Sections 7(3) and (4)):
- Close-out protection is based on the total initial margin required for all open CFDs in a client’s account.
- Issuers cannot net off opposing positions when calculating the close-out protection amount.
ASIC’s concerns are that offering margin discounts may encourage retail clients to take on excessive leverage and increase risks, leading to higher overnight funding costs and potential sudden margin increases when a position is closed.
Why This Matters for Retail Clients
ASIC believes that offering these “margin discounts” could harm retail clients by:
- Encouraging them to take on overly leveraged positions.
- Increasing their overnight costs (swap fees).
- Delaying important margin close-out protection, exposing clients to large losses.
- Leading to sudden increases in margin requirements if one of the opposing positions is closed.
What Should CFD Brokers Do?
ASIC’s message is clear: brokers must immediately stop offering illegal margin discounts. To comply with these regulations, brokers should:
- Review Disclosure Documents:
- Ensure that these documents don’t include “margin discounts” for opposing CFD positions.
- Examine Current Practices:
- Check if margin discounts are being offered to retail clients and take action if necessary.
- Assess Compliance:
- If breaches have occurred, report them to ASIC and take steps to remedy any affected clients.
- Remediate Clients:
- Consider compensating any clients who may have suffered losses due to these practices.
In summary, brokers offering CFDs must ensure full compliance with ASIC’s CFD PIO rules to avoid penalties and protect retail clients from undue risks. Immediate action is necessary to review and adjust any non-compliant practices.