Australia to crack down on high-stakes derivatives trading

SYDNEY (Reuters) - Australia’s market watchdog on Wednesday said it plans to ban the sale of “binary” options to retail customers and introduce restrictions on sales of other derivative instruments seen as high-risk transactions.

FILE PHOTO: A businessman takes a cellphone picture of Australia's stock exchange index on an electronic board in Sydney, September 20, 2016. REUTERS/Jason Reed

The proposed curbs on the A$2 billion ($1.36 billion) a-year industry follows other regulatory bans in Europe and North America and follows new intervention powers granted to the Australian Securities and Investments Commission (ASIC) in April.

The global crackdown on high-stakes financial betting by amateur traders has already hurt earnings of trading platforms IG Group IGG.L Plus500 PLUSP.L, CMC Markets CMCX.L, and Interactive Brokers Group Inc IBKR.EI, all of which have a big presence in Australia.

“ASIC is concerned that retail investors have suffered, and are likely in future to suffer, significant detriment from binary options and contracts for difference (CFDs),” it said in a statement. CFDs allow traders to bet on financial asset prices without holding the asset.

The regulator issued a consultation paper outlining plans to ban all sales of binary options to retail customers, which it likened to gambling products.

Binary options are over the counter (OTC) derivatives that allow clients to make “all-or-nothing” bets on specific events in a specific timeframe, such as a rise in the gold price within a 30 second window.

According to ASIC, issuers of such products generated gross trading revenue of A$2 billion in 2018, of which 25% were from binary options and the balance from CFDs.

“We estimate that retail client losses from trading binary options were at least $490 million in 2018,” the paper said.

The proposal is open to submissions from market participants until Oct. 1 and ASIC expects to reach a final decision shortly after the consultation period ends, a spokesman said.

“A complete ban would prevent retail clients from losing money trading binary options,” ASIC Commissioner Cathie Armour said in a statement.

Under its proposal, retail sales of CFDs would have leverage limits and rules to improve pricing transparency.

In recent years, regulators in Europe and North America have moved to ban or limit the issue and distribution of binary options to retail clients, and some have introduced leverage limits on CFDs.

According to ASIC’s review, Australian issuers of binary options and CFDs have about one million clients. Of these, 17% were domestic, a fifth were in China, where such trades are prohibited, and about 41% were in the rest of Asia.

Reporting by Paulina Duran; Editing by Sam Holmes