ASIC extends CFD product intervention order for a further five years
07 April 2022
On 6 April 2022, ASIC released the ASIC Corporations (Product Intervention Order Extension – Contracts for Difference) Instrument 2022/259 (Extension Instrument), which extends conditions on the issue and distribution of contracts for difference (CFDs) until 23 May 2027.
What you need to know
- ASIC has extended the operation of ASIC Corporations (Product Intervention Order – Contracts for Difference) Instrument 2020/986 (Product Intervention Order) after stating that is has seen a substantial reduction in harm to retail clients resulting from trading in CFDs following its introduction.
- ASIC states that the Extension Instrument ensures that CFD protections in Australia remain in line with those in force in comparable overseas jurisdictions.
- No amendments have been made to the Product Intervention Order despite industry feedback with regards to its effectiveness, particularly in respect of the leverage ratio limits.
What you need to do
- Continue to comply with the conditions imposed by the Product Intervention Order where it is applicable to your business.
- Consider how the Product Intervention Order has impacted your business and whether additional steps need to be taken to ensure your ongoing compliance with the conditions it imposes.
Background
Since March 2021, the issue and distribution of CFDs has been subject to various restrictions as contained in the Product Intervention Order.
The Product Intervention Order aimed to reduce risks to retail clients in relation to CFD trading, in particular by imposing leverage limits, margin close out requirements, and prohibiting CFD product features and sale practices which ASIC considered to amplify CFD losses borne by retail clients. For a complete summary of the conditions imposed by the Product Intervention Order, please see our previous Financial Services Update.
ASIC Consultation
With the Product Intervention Order due to expire on 23 May 2022, ASIC released Consultation Paper 348: Extension of the CFD product intervention order (CP 348) in late 2021. CP 348 summarised ASIC's analysis of the impact of the Product Intervention Order on reducing retail client detriment from CFD trading and sought industry feedback on its proposal to extend the conditions on the issue and distribution of CFDs until the Product Intervention Order is revoked.
ASIC noted that it had observed significant improvements in a number of key metrics and indicators of retail client detriment from CFD trading in the three months following the implementation of the Product Intervention Order. In particular, ASIC found that:
- retail client losses had substantially reduced;
- greater parity had been achieved between profit-making and loss-making in CFD trading;
- the amount of active retail client accounts had and the gross value of open CFD positions had each significant decreased;
- the proportion of retail clients experiencing margin close-outs or entering negative account balances had both declined; and
- inducements were increasingly being provided to wholesale clients, with the value of benefits provided to retail clients dropping significant.
It was also highlighted in CP 348 that the regulatory compliance costs for licensed CFD issuers were considerably lower than expected.
ASIC ultimately concluded that these findings justified its proposal for the Product Intervention Order to remain in force, with feedback sought from industry on the length of the extension. In this regard, ASIC stated that it did not believe that a temporary extension would be appropriate, noting this would create unnecessary regulatory uncertainty and additional regulatory burden on CFD issuers and retail clients.
Response to the consultation
ASIC received 49 submissions in response to CP 348, with these summarised in Report 724: Response to submissions on CP 248 Extension of the CFD product intervention order (REP 724).
The majority of respondents did not support the proposal to extend the Product Intervention Order, with industry specifically questioning the impact of the leverage ratio limits. Having said this, most respondents were supportive of the other aspects of the Product Intervention Order, including the margin close-out protection, negative balance protection and prohibition on inducements.
Having regard to the consultation feedback, ASIC nevertheless considered it appropriate to extend the Product Intervention Order without amendment for a period of five years. The additional data analysis that had been conducted following the release of CP 348 was cited by ASIC as a key reason for this decision, with this confirming its initial views that the Product Intervention Order was achieving its objectives effectively and efficiently.
Outcome and extension
ASIC has extended the Product Intervention Order imposing conditions on the issue and distribution of CFDs for a further five years until 23 May 2027. No changes have been made to the Product Intervention Order.
Authors: Corey McHattan (Partner); Oliver Digby (Associate); and Jack Collins (Associate).
