CFD Providers

Financial Requirements

Retail CFD providers are required to meet the following financial requirements:

• solvency and positive net assets requirement;
• tailored cash needs requirement;
• tailored audit requirement;
• net tangible assets (“NTA”) requirement; and
• surplus liquid funds (“SLF”) requirement – applicable if client money held is $100,000 or more.

Wholesale-only CFD providers are required to meet the following requirements:

• solvency and positive net assets requirement;
• standard cash needs requirement;
• standard audit requirement;
• adjusted surplus liquid funds (“ASLF”) requirement; and
• SLF requirement – applicable if client money held is $100,000 or more.

Details of these are found in ASIC Regulatory Guide 166.

Applicability of the “Price or Value Test” to wholesale clients for CFD products

The Price or Value Test is NOT applicable to derivatives that are CFDs. This means that a CFD provider cannot rely on the price or value test to categorise a client as a wholesale client. Please click here for further information.

Design and Distribution Obligations (“DDO”) – retail clients only

Under the DDO regime, retail CFD issuers and distributors must take reasonable steps to ensure they distribute products to retail clients in a manner that is consistent with the target market determination (“TMD”) for the product.

The DDO requirements relate to:

• product design;
• TMDs, suitability tests, filtering unsuitable clients – click here to read about the use of retail client questionnaires
• taking reasonable steps in relation to distribution, monitoring and review;
• notification of significant dealings; and
• record-keeping.

ASIC previously undertook a review of DDO compliance by OTC derivative issuers to retail clients. Its findings can be found in ASIC Report 770 – click here for a summary of the key findings in this report.  Refer to ASIC Regulatory Guide 274 on DDO obligations generally.

Disclosure guidance for OTC CFDs – retail clients only

There are a total of 7 benchmarks and their corresponding disclosure requirements set out in ASIC Regulatory Guide 227. ASIC expects an issuer of OTC CFDs to address the benchmarks in its disclosure to retail clients on an “if not, why not” basis. These benchmarks are aimed at helping retail clients understand the risks associated with these products, assess their potential benefits and decide whether investment in the products is suitable for them. CFD issuers should also ensure that their advertising is consistent with the information provided in disclosure documents.

Product Intervention – retail clients only

The Product Intervention Order in respect of CFDs was introduced in 2021. It covers a range of different rules governing the issuance of CFDs, including:

• leverage ratio limits ranging from 30:1 to 2:1 – click here to read about leverage ratio breaches;
• margin close out protection;
• negative balance protection; and
• prohibition on offering or giving certain inducements or benefits.

For further information on ASIC’s product intervention power generally, please click here.

Dealing with client money

In addition to the general rules regarding client money which apply to all licensees, CFD providers who handle derivative retail client money are subject to specific requirements.

Derivative retail client money refers to client money paid by retail clients and sophisticated investors in connection with a financial service relating to a dealing in a derivative. The additional requirements when dealing with derivative retail client money include:

• restrictions on the use/withdrawal of derivative retail client money;
• record-keeping for each client and on an aggregate basis;
• daily and monthly reconciliation;
• reporting to ASIC on reconciliation issues;
• supervisory policies and procedures for compliance with the Rules; and
• financial records and auditor’s certification of compliance with client money provisions.

These requirements are set out in ASIC Regulatory Guide 212 and the ASIC Client Money Reporting Rules 2017 – click here for further information.

OTC Derivative Reporting

All CFD providers must comply with the ASIC Derivative Transaction Rules (Reporting) 2024, which require trades to be reported to a licensed Australian Derivative Trade Repository (“ADTR”) on a daily basis. For further information, refer to ASIC Regulatory Guide 251.

Note: Sophie Grace does not assist with derivative transaction reporting. If you are interested in trade reporting services, please click here.