Australia’s sovereign wealth fund’s prediction of a tough year for investors didn’t come to pass, but they’re not the only well-resourced manager that missed the mark. For investors, this period is a reminder that investment patterns may exist, but markets certainly aren’t beholden to them.
It’s essential that we learn from the Dixons Advisory scandal, the FAAA chief said, so we can avoid future harm. The association has asked the government to consider a full inquiry into the case, while advisers contemplate the financial toll ahead of them.
CFD market ‘active’ again after ASIC crackdown
Most would be aware how easy it is to trade CFDs, or ‘contracts for difference’. And it certainly is easy, with at least 18 trading platforms regulated by the Australian Securities & Investments Commission (ASIC) to offer trading in the instruments – and others that can be accessed in other countries.
But CFDs need to be handled with care.
A CFD emulates the underlying price of the share, index, exchange rate or commodity to which the CFD applies. When you trade a CFD you are speculating on the market price, without ever owning the underlying asset.
An investor buying a ‘long’ CFD benefits from a rise in the share price, while a ‘short’ CFD gives the benefit of a fall in the share price. The investor’s profit or loss is determined by the difference between the opening and closing price, with the difference paid at the close of the contract – hence, the term ‘contracts for difference’.
Each CFD represents an agreement between the client and the CFD provider to settle, in cash, the difference between the price at which the client ‘opens’ the CFD and the price at which the position is ‘closed’. CFDs are leveraged instruments, meaning that an investor lodges a deposit (a margin) that allows them to control a much larger position.
That can significantly increase the returns on an investment; but the crucial caveat with leverage is that while it can magnify your gains, it can also magnify your losses. Simply put, if you do not understand leverage well, trading CFDs can be dangerous to your bank account.
Introduced to Australia in March 2002, CFDs grew rapidly, becoming a $2 billion market, but ASIC quickly became troubled by both the amounts of leverage available in the market, and the marketing to retail investors. Australian share CFDs commonly offered leverage of 20 to one (a $5,000 deposit could control a $100,000 share position), while index CFD leverage was 200 to one (a $5,000 deposit could give $1 million worth of exposure). And CFDs over currency pairs (every trade in the foreign exchange market is a pair: you sell one currency to buy another) had leverage of up to 500 to one (putting down $5,000 could control a position worth $2.5 million).
ASIC reviews in 2017, 2019 and 2020 found that most retail clients lost money trading CFDs. According to ASIC, 72 per cent of clients who traded CFDs lost money in 2018 alone.
Then, in a five-week period during the “COVID Crash” in March and April 2020, ASIC found the retail clients of a sample of 13 CFD providers made a net loss of more than $774 million, with more than 15,000 retail client CFD trading accounts falling into a negative balance, owing a total of $10.9 million.
In November 2020, ASIC announced that it would impose conditions on the issue and distribution of CFDs to retail clients, to take effect in March 2021, and be assessed in September 2022.
ASIC restricted CFD leverage offered to retail clients to a maximum ratio of:
- 30:1 for CFDs over an exchange rate for a major currency pair
- 20:1 for CFDs over an exchange rate for a minor currency pair, gold or a major stock market index
- 10:1 for CFDs over a commodity (other than gold) or a minor stock market index
- 2:1 for CFDs over crypto-assets
- 5:1 for CFDs over shares or other assets.
Immediately following ASIC’s tightening of the regulations in 2021, CFD volumes traded in Australia fell by up to 80 per cent, depending on the provider. Clients who wanted higher leverage had to take their business to accounts based in other jurisdictions. Within six months, the regulator said, the changes had reduced aggregate net losses by retail investors by 91 per cent; in April 2022, ASIC announced that the new conditions would remain in place until 2027.
ASIC has also used the design and distribution obligations (DDO), introduced in October 2021, to curtail CFDs. The DDO obligations require firms to design financial products to meet the needs of consumers, and to distribute their products in a “more targeted manner”.
The regulator issued stop orders against CFD trading platform providers Saxo Capital Markets and Mitrade Global to protect consumers from high-risk CFD trading, preventing them from offering the products for a specified period. It warned financial product issuers in May 2023 to “lift their game” after finding “across-the-board” deficiencies in marketing materials. Then, in August 2023, it took online investment platform eToro to court on DDO grounds, alleging that it inappropriately exposed unsophisticated clients to CFDs, calling them a “high-risk and volatile” product that most retail investors lose money on.
The latest crackdown, in May, hit CFD trading platform provider TMGM, which received two interim stop orders alleging that the broker had an inadequate retail investor questionnaire for compliance with its obligations and a lack of other controls in its onboarding process to assess whether clients are likely to be in its target markets.
Tamas Szabo, chief executive officer of broker Pepperstone, which is Australia’s largest CFD provider, says the market has “contracted significantly” since ASIC’s product intervention order in 2021, but it is still an “active market”. He says the bulk of Pepperstone’s business is currency and gold CFDs, with index and crypto CFDs also growing in use.
“It wasn’t just the change of maximum leverage settings, although that has been the really fundamental shift; there has also been a big focus on making sure that your client onboarding process is really tight,” Szabo says.
“That’s in terms of not only clearly outlining the potential risks of the product, but also questioning clients who apply for an account to satisfy yourself that they understand the dynamics of the product, and that they don’t own the underlying assets, that they understand leverage, and they understand position-sizing. We only onboard people who understand the risks and are comfortable with the use of leverage, and that’s how it should be,” he says.
Not surprisingly, those who qualify as wholesale and sophisticated investors make up the bulk of the client base.
