ASIC raises alarm over new CFD trade risks
By Lucy Battersby | smh.com.au | 24 August
Regulators are moving to close a legal loophole that is potentially putting hundreds of millions of dollars at risk in an already-risky trading instrument that allows investors to make bets on the direction of share, currency and commodity prices using borrowed funds.
Complex derivative products called "contracts for difference", or CFDs, have been aggressively marketed to retail investors since their introduction to Australia seven years ago.
The corporate regulator already warns on its consumer protection website that CFDs are "much riskier than a flutter on the horses or a night at the casino".
But now the Australian Securities and Investments Commission is focusing on the risks posed by CFD brokers pooling client funds and using the money to offset other clients' trades.
The regulator is concerned that even if one client has made sound investment decisions, he or she may not realise the money is still at risk if enough clients in the same pool make the wrong bets and cannot meet margin calls. For their part, leading CFD brokers deny client money is at risk.
They say that internal liquidity and risk management policies are in place to prevent individual losses spreading to other traders. But ASIC is raising concerns about pooling and has launched a consultation paper that asks whether CFD brokers have properly informed clients about the trading risks.
Previously the regulator has been concerned that CFD providers were targeting unsophisticated investors in their advertising. CFDs, which were introduced to Australia in 2002, essentially allow investors to bet, with borrowed money, on whether a share price or market index will go up or down.
Investors need to deposit funds with the broker to cover the buying price, but the broker then provides up to 95 per cent of borrowed funds to increase the exposure to any price movement.
Investors can make substantial gains, but also massive losses if the price falls. In its consultation paper, ASIC said clients needed to be aware that their funds could be used for "other purposes" related to trading derivatives and not just the amount relating to an individual client's payments.
"The law is very broad in this area ... what we are trying to do is give [CFD] issuers guidance on how they can comply with the law," an ASIC spokesman said. Some providers have started changing their policies since the paper was released this month.
The CFD market has experienced fast growth in recent years, with more than 32,000 Australians trading the instruments and about $400 million invested. IG Markets and CMC Markets are the biggest providers, sharing 50 per cent of the domestic market, although both say they do not use client money for hedging.
IG Markets says it requires written consent before it pools client funds. "When someone trades CFDs you hope they understand the risk of the product and we make efforts to make sure that they do", the chief executive of IG Markets, Tamas Szabo, said.
"[And] we welcome this move by ASIC as it can only help to increase consumer confidence in the CFD sector as a whole."
First published by Smh.com.au on August 24 2009
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