CFDs – Using the Holidays Wisely – How to take a Proactive Approach to ASIC’s Proposed Bans and Restrictions to be Imposed on OTC Binary Options and CFD Providers

AFS Licensees should start taking steps now to prepare for ASIC’s proposed bans and restrictions which will affect OTC Binary Options and CFD Providers to avoid any delays providing financial services in a compliant manner after the final instruments are released.

Although it is unknown when the final instruments will be released or what exactly they will contain, we consider that some aspects of the proposed requirements will not deviate largely from the drafts and issuers can make a start on preparations for compliance.

We suggest using the quiet holiday period to get ahead on revisions and drafting to avoid being caught in a rush (and a queue for sign-off by external consultants) once the instruments are released.

Next Steps for Licensees issuing CFDs

In preparation of the finalised CFDs Instrument, AFS Licensees who deal in CFDs with retail clients should:

  1. Prepare communications required by ASIC to be sent to clients within 5 business days of commencement of the finalised CFDs Instrument;
  2. Review marketing materials to ensure no prohibited benefits (for example gifts, rebates, trading credits or rewards) are given as an inducement to retail clients and make a record of any campaigns and materials which will need to be removed or adjusted after the CFDs instrument commences;
  3. Review whether your current systems are able to implement the leverage and margin restrictions proposed by ASIC;
  4. Review whether your systems are able to implement the margin close out protection and negative balance protection and update your PDS and T&Cs to cover the margin close out and negative balance requirements;
  5. Prepare updated risk warnings in accordance with the prescribed warnings noted in the Draft CFDs Instrument and make a list of all places where the warning will need to be included or updated;
  6. Review whether your trading platforms display real time information required by the Draft CFDs Instrument including total position size and overnight funding costs; and
  7. Prepare documentation to outline the pricing and execution methodologies used by your firm when dealing with retail clients.

Background Information

ASIC’s consultation paper Product Intervention: OTC Binary Options and CFDs (“CP 322”) included a number of proposals to address the significant detriment the OTC Binary Options and CFDs space that ASIC considers has been caused to retail clients.

ASIC released CP 322 to introduce the proposed changes to the public. The consultation process concluded on 1 October 2019.

Under CP 322, ASIC proposed to:

  • ban the issue and distribution of OTC Binary Options to retail clients, and
  • impose conditions on the issue and distribution of OTC CFDs to retail clients.

ASIC considers that Binary Options and CFDs have resulted in, and are likely to continue to result in, significant detriment to retail clients, primarily financial losses.

The significant detriment ASIC considers is faced by retail clients is what ultimately prompted ASIC to consult on the area and propose restrictions and bans. ASIC has taken strong and frequent regulatory action against OTC Derivatives and CFD Licensees, using a range of regulatory tools, to address their concerns about Binary Options and CFDs. Further information on the action can be found in ASIC’s recent Media Release “19-220MR ASIC proposes ban on the sale of Binary Options to retail clients, and restrictions on the sale of CFDs”.

Further Reading

AFS Licensees need to understand the proposed changes in order to consider how the restrictions and/or bans may affect their future business operations.

If you would like to further discuss how these proposed changes could affect your business, please contact us.

About The Author

Ivana Josic

Ivana is responsible for all Marketing activities for Sophie Grace and assists both the Compliance and Legal teams with a particular focus on Compliance services. Ivana focuses on website development, management and ensures clients receive the latest regulatory updates through Sophie Grace social media channels, the newsletter and website blog page. Ivana also assists the Compliance team with drafting and amending compliance documentation, preparing AFSL and ACL Applications and implementing ongoing compliance solutions.