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CFD Providers

Sophie Grace has extensive experience in advising retail and/or wholesale over-the-counter (“OTC”) derivative issuers and distributors (including OTC CFD providers) in launching their financial services as well as providing ongoing compliance and legal support.

CFD means Contracts for Difference which are a type of OTC derivative contract that are generally considered as high-risk financial products. In addition to the general laws and regulations for all financial products in Australia, there are specific laws and regulations on CFD providers which often makes it difficult for providers to understand what applies and what does not. 

Key instruments that are specifically applicable to CFD providers:

ASIC Corporations (Product Intervention Order – Contracts for Difference) Instrument 2020/986

This instrument was introduced in 2021 and will remain in force until 2027. It covers a range of rules governing the issuance of CFDs. Read this webpage for further information on ASIC’s product intervention power.

ASIC Corporations (Product Intervention Order – Contracts for Difference) Instrument 2020/986

Retail Clients

Wholesale Clients

Overall applicability.

Yes

No

Leverage Ratio Limits ranging from 30:1 to 2:1. View our previous blog article about leverage ratio breaches.

Yes

No

Standardisation of margin-close out rules

Yes

No

Negative balance protection

Yes

No

Prohibition on offering or giving certain inducements

Yes

No

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

According to section Reg 7.1.22AA of the Corporations Regulations 2001, the Price and Value Test is NOT applicable to derivatives that are CFDs. This means that a CFD provider cannot rely on the Price and Value Test to categorise a client as a wholesale client. Read this blog for further information.

 

Retail Clients

Wholesale Clients

Client can be classified as wholesale using the ‘Price and Value Test’?

No

No

ASIC Client Money Reporting Rules 2017 (“Rules”)

Retail Clients

Wholesale Clients

Overall applicability

Yes – including Sophisticated Investors.

This means that Sophisticated Investors are considered Retail Clients for the purpose of the Rules

No – but Sophisticated Investors are considered Retail Clients for the purpose of the Rules

Record-keeping requirements for derivative retail client money. 

Daily and monthly reconciliation requirements for derivative retail client money. 

Reporting requirements and annual declarations by directors and auditors

Requirements to have supervisory policies and procedures to comply with the Rules

ASIC Regulatory Guide 212: Client Money Relating to Dealing in OTC Derivatives

Retail Clients

Wholesale Clients

Client money accounts must be opened as a trust account, client money must be segregated from the CFD provider’s own funds.

Yes

Yes

Only certain money can be paid into a client money account as per RG212.19, and a CFD provider must pay client money into a client money account on the day it receives it or the next business day.

Yes

Yes

Prohibition on a CFD provider to deposit funds belonging to it into client money accounts, by way of ‘buffer’ or otherwise.

Yes

Yes

A CFD provider must keep financial records in sufficient detail to explain all money received or paid by it in relation to client money accounts it holds

Yes

Yes

Auditor’s report accompanying the CFD provider’s financial statements must contain a statement of the auditor’s opinion on the licensee’s compliance with the client money provisions.

Yes

Yes

Restrictions on the use of derivative retail client money

Yes – including Sophisticated Investors. Read a previous article about OTC derivative client money here

No – but Sophisticated Investors are considered as Retail Clients for the purpose of this requirement.

Rules regarding permitted uses of and withdrawals from client money accounts 

Yes

Yes

ASIC Regulatory Guide 227 OTC CFD: Improving disclosure for retail clients

Retail Clients

Wholesale Clients

Overall applicability.

There are in total 7 benchmarks and their corresponding disclosure requirements set out in RG227. ASIC expects an issuer of OTC CFDs to address the benchmarks in its disclosure to retail clients on an “if not, why not” basis.

Yes

No

Design and Distribution Obligations – ASIC Regulatory Guide 274: Product Design and Distribution Obligations and Report 770 Design and Distribution Obligations: Retail OTC Derivatives

Retail Clients

Wholesale Clients

Overall applicability. Read this blog article for a summary of the key findings in ASIC Report 770.

Yes

No

Requirements regarding product governance arrangements

Yes

No

Requirements regarding Target Market Determinations, suitability tests, filtering unsuitable clients and notification of significant dealings

Yes

No

Requirements regarding distribution

Yes

No

Sophie Grace can assist with the following:

  1. Licensing – Sophie Grace can work with you to determine and obtain the appropriate licence for your CFD business either through a new licence application or licence acquisition;
  2. Building your compliance program – Sophie Grace can work with you to establish your compliance regime that is tailored to your CFD business. Please refer to this page for further details;
  3. Launching your trading services – Sophie Grace can assist you in preparing appropriate disclosure documents required to launch your CFD products to the market. The disclosure documents we can assist you with include:
    * Product Disclosure Statements;
    * Retail Client Agreement (or Retail Client Terms and Conditions);
    * Financial Services Guide;
    * Wholesale Client Agreement (or Wholesale Client Terms and Conditions); and/or
    * Target Market Determinations
  4. Assisting with any legal agreements with any third parties, including but are not limited to:
    * Introducing Broker Agreement;
    * Referral Agreements;
    * Liquidity Agreements;
    * Corporate Authorised Representative Agreements;
    * Responsible Manager Agreements;
    * Any other third party service agreements in relation to your offering of CFDs.
  1. Providing ongoing legal and compliance support when you need us. Examples of what we can do include:
    * Assisting with any notices from regulators;
    * Participating in your regulator compliance meetings and providing legislative updates;
    * Advising on Anti-Money Laundering and Counter-Terrorism Financing related questions;
    * Responding to your ad hoc legal and compliance questions.

If you need support, please do not hesitate to contact us via our LiveChat or send us an email here

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