Legislation being introduced in 2021 will impact CFD traders in Australia.
Here’s what you need to know
From the 29th of March 2021, new conditions will be imposed on anyone who offers, issues, or engages in dealing activities that allow retail clients to trade CFDs in Australia. If you hold a retail trading account at any broker and you trade CFDs, it is vital that you are aware of the changes on any instrument.
Who is imposing the changes?
These changes result from a product intervention order issued by the Australian Securities and Investments Commission (ASIC). The changes will affect contracts for difference (CFDs) offered to retail clients. All ASIC registered brokers will need to abide by the new legislation.
Why are the changes needed?
The changes are being put in place to protect CFD traders like you. They raise industry standards and bring Australian regulations in line with those in Europe and other parts of the world.
How will this affect me?
If you trade CFDs in Australia via a retail account, you will potentially be affected. If you are not sure if you hold a retail account, check with your broker. Your account is likely to be a retail account unless you are a professional trader.
How CFDs can be traded is to change in several ways, and the changes apply to various areas. Full details can be found at the government website, but we have summed up how these changes may impact you as a retail CFD trader.
Leverage ratio limits
New limits are to be placed on the amount of leverage offered to CFD traders holding retail accounts. The new legislation will also impose minimum initial margin requirements on CFDs issued to retail clients. That will mean those leverage ratios offered at the time that a CFD is issued must not exceed:
- 30:1 for a major currency pair
- 20:1 for a minor currency pair, gold or a major stock market index
- 10:1 for a commodity (other than gold) or a minor stock market index
- 2:1 for crypto assets
- 5:1 for shares or other assets
Margin Close-Out Protection
The new legislation requires that the terms of a CFD offered to a retail client must provide margin close-out protection. Therefore, action must be taken if the net equity of the client’s CFD trading account falls to less than 50% of the aggregate close-out protection amount. The aggregate close-out protection amount refers to the total initial margin, or total margin required, for all of the open CFD positions on that account.
When that condition is met, the CFD issuer must take action by closing out one or more open CFD positions held by the retail client as soon as market conditions allow.
The CFD issuer is required to close out open positions until the trading account’s net equity is equal to (or more than) the aggregate close-out protection amount for the remaining open CFD positions. Alternatively, positions may be closed by the issuer until all of the CFD positions permitted to be terminated under this condition have been ended.
Negative Balance Protection
A further requirement of the new legislation is negative balance protection. Many brokers in Australia already offer that safeguard, but it will become a legal obligation when the new rules take effect. Negative balance protection limits the retail client’s losses on CFD positions to the funds in a CFD trading account. That guarantees a client’s account will not move into a negative balance, causing the client to lose more money than they have deposited with the CFD issuer.
Prohibitions on Inducement
The new legislation will prohibit the giving or offering of a gift, discount, rebate, trading credit, or reward to a retail client (or prospective retail client) as an incentive to open or fund a CFD trading account or to begin trading CFDs. That, in effect, prohibits the offer of new customer bonuses, deposit bonuses, and most other types of rewards and bonuses offered by brokers. The prohibitions do not cover:
- The provision of information services or educational or research tools
- Discounts of fees and costs that are offered to all retail clients and prospective retail clients, including volume-based discounts
What do I need to do now?
As a CFD trader, all you need to do is familiarise yourself with the new legislation and assess its potential impact on your trading account and your trading activities. Remember, the legislation will come into effect by the 29th of March 2021, and you may see changes to your retail trading account’s terms and conditions based on the legislation on or before that date.