Australia FX brokers seek experienced investor provisions under new CFD rules

SYDNEY, Sept 26 (Reuters) - Australia’s foreign exchange brokers are lobbying regulators to create provisions for experienced retail investors to trade high-risk currency derivatives under a proposed tightening of trading rules, people familiar with the matter told Reuters.

The Australian Securities & Investment Commission (ASIC) last month proposed some restrictions on the sale to retail clients of contracts for difference (CFD), which brokers say would cripple an industry with an annual gross turnover of A$22 trillion ($15 trillion).

A CFD is a contract that allows clients to speculate on the change in the value of an asset without owning it. CFDs provide much higher leverage than traditional trading, making them highly risky because losses are potentially uncapped.

The market for CFDs and binary options - an “all or nothing” bet on the outcome of an event - in Australia has more than doubled in revenue and clients in the past two years. ASIC has also proposed banning binary options for retail customers.

ASIC said the vast majority of Australia’s almost 1 million CFD and binary options clients are retail investors, with nearly two-thirds based in Asia where limits on leverage ratios are much lower than in Australia.

For example, Sydney-based CFD provider IC Markets advertises leverage of up to 500 times the money a client invests, while other providers said they offered leverage of 100-200 times. By contrast, leverage ratio caps in Hong Kong and Singapore is 20 to 1, broadly in line with ASIC’s proposals.

Industry participants are lobbying ASIC to create a new regulated category of “experienced” retail investors, they said requesting anonymity.

“We are very supportive of introducing a leverage cap but 100-200 times seem more fair,” said one of the four sources.

“We are talking to ASIC to introduce a new type of retail investor class, which has a better understanding of the market and the risk. We have clients who have been doing CFD trading for years, they are not happy about the possibility of just 20 times leverage.”

ASIC has so far not given any indication to brokers it will introduce a new investor class, the source said.

ASIC declined to comment to Reuters as its consultations with the industry run until Oct. 1.

The watchdog is concerned about harm to retail investors from high-risk and complex products such as CFDs. Its review in 2017 found that 80% of clients who traded binary options and 72% of those who traded CFDs lost money.

Regulators around the world have restricted or prohibited the provision to retail investors of certain OTC derivatives, though there are precedents for new experienced investor categories in markets like Poland and Cyprus.

$1 = 1.4723 Australian dollars Reporting by Swati Pandey; Editing by Sam Holmes