Australia’s ASIC Announces Leverage Cap, Negative Balance Protection

Australia’s ASIC Announces Leverage Cap, Negative Balance Protection

To improve investors’ protection which until now was lacking in the regulation of the Australian forex companies, the Australian Securities and Investments Commission (ASIC) has announced reducing CFD leverage, protection against negative balances, standardised CFDs brokers margin close-out, ban on bonuses and other incentives, and a possible ban on binary options.

News of changes in the regulatory legislation regarding the limit in leverage for the Australian forex companies is either bringing joy or despair in the hearts of the Aussie forex trade brokers. CFD trading is based on speculations on rising or falling prices and is used in trade of shares, forex, indices and commodities. Whether profits or losses are made depends on the accuracy of the forecast.

Until recently, there was no restrictions on leverage for Australian forex brokers which made trade via them a double-edged sword. As you are aware, high leverage is exciting as it entice traders to dream of big win. However, not all dreams come true and given the fact that over 70% of traders lose in transactions, chances are that high leverage can bring a big blow that will shatter your dreams. In its reviews for 2017, 2019 and 2020, ASIC has stated that clients lose money trading CFDs. Research shows that only between March and April 2020, the clients of a sample made of 13 brokers trading in CFD, have made a loss of more than $774 million, so ASIC has taken measures to address the situation.

As per the ASIC Commissioner, Cathie Armour, the high losses were due to the high leverage in CFDs and the ongoing market volatility during the COVID-19 pandemic. Changing the legislation regarding the limitation on leverage in Australia is without any doubt a step in the right directions.

ASIC has specified what the leverage caps will be for each asset:

  • 1:30 leverage for CFDs on major currency pairs made of Australian, Canadian or US dollar, British pound, euro, Japanese yen and Swiss franc;
  • 1:20 leverage for CFDs on minor currency pairs made of any currency pairs excluding the major currency pairs, gold or a major stock market index, such as CAC 40, DAX, Dow Jones Industrial Average, EURO STOXX 50 Index, FTSE 100, NASDAQ-100 Index, Nikkei Stock Average and others;
  • 1:10 for CFDs on commodity or minor stock market index which is any stock market index that is not a major stock market index;
  • 1:5 for CFDs on shares and other assets;
  • 1:2 for CFDs on crypto-assets.

Another measure undertaken by ASIC is to standardise CFDs brokers’ margin close-out arrangement that will act as circuit breaker to close-out before the forex traders make an investment loss. During March-April 2020 period only, over 1.1 million CFD positions were terminated under margin close-out arrangements compared to nearly 2 million less for the whole of 2018!

Introducing protective measures against negative account balances was triggered by the fact that more than 15,000 forex traders’ CFD accounts fell into negative balance amounting to a total of $10.9 million for the same period of only 2 months in 2020 compared to 41,000 accounts owing $33 million for the whole of 2018.

And finally, a ban on offering bonuses, trading credits and rebates or ‘free’ gifts to insure protection on clients’ funds as well as considering a ban on binary options trade is a move in the right direction.

ASIC new measures to ensure traders’ funds protection are also in tune with the regulatory conditions in the European Union and the United Kingdom. No doubt, these measures introduced by ASIC will improve the traders’ funds protection and will bring more clients to the Aussie brokers.

The order will remain in force for 18 months with chances to be extended to permanent.

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