A new regulation set by the Australian Securities and Investments Commission (ASIC) is being hailed by Australian Forex brokers, despite leading to low volume in the contract for difference (CFD) market. The regulation, which became effective on March 29, 2021, restricts leverage levels for retail CFD traders up to 30:1, a significant drop from the 400:1 leverage previously afforded traders.
Though market momentum is expected to be deeply impacted, ASIC is seeking to protect traders from significant losses by limiting their leverage, and Australian Forex brokers are welcoming the new mandate.
New Forex traders are particularly susceptible to losses, taking out high leverage and entering trades with large positions without appropriate risk management. OANDA Australia Managing Director Anthony Griffin is one such broker who praised the move by ASIC, noting the propensity of less experienced traders to place losing trades and not mind their risk. “Many of these traders undoubtedly learned their lesson the hard way,” said Griffin.
This edict by ASIC is anything but impulsive; the Australian regulator has been discussing such trading product intervention measures for years in its efforts to protect beginner traders. But it is not only from their own inexperience that traders need protection; the industry has been fraught with fraud in the binary options sector, which ASIC will ban effective May 2021. Just days before announcing the new CFD regulation, in fact, binary options broker AlphaBinary was fined AUD 75 million by an Australian court.
Even those brokers who think ASIC's move unnecessary still do not consider it an overstep. “I don't believe they were necessary, changing the leverage doesn’t change the outcome for clients,” said TRAction Fintech co-CEO Quinn Perrott. “The clients’ win-loss ratio remains the same even if it happens at a slower pace. Having said that, I also don’t think it is an overstep. It is well within regulator rights and aligning ASIC with global regulations was essential as a de-facto obligation.”
Volume Impact
The Australian Forex and CFD brokers supporting ASIC's regulation are doing so knowing that market trading volumes will shrink significantly, at least for retail accounts. Indeed, after European regulator ESMA intervened with leverage restrictions in 2018-2019, trading volume experienced a pullback.
However, Perrott says that the impact of ASIC's restriction will be somewhat less than that of ESMA. “Our experience in Europe after the ESMA changes were implemented was an approximately 30 percent drop in daily transaction numbers. We anticipate the impact after the ASIC start date of 29 March 2021 to be slightly less,” he said.
OANDA's Anthony Griffin remains a proponent of the new restriction, despite OANDA's 20% loss in European revenue in 2019, which the company says is a result of the ESMA's leverage restrictions.
ASIC Licensing
ASIC has been emerging as a prominent market watchdog in its own right, with many brokerage firms seeking the regulator's AFS license to operate in Asian-Pacific markets. With growing demand for its licensure, ASIC issued 394 licenses between 2019 and 2020.
However, some market players point out that there is still work to do on ASIC's part, such as bolstering oversight, tightening loopholes and ensuring licensing transparency, before it attains the same repute as Europe's ESMA or the UK's FCA.