A Guide to New Leverage Restrictions in Australia

Leverage is like marmite, you either love it or you hate it. Unfortunately, many retail forex and CFD traders are in the category of loving it. However, financial services regulators know what’s best for them. An announcement from the Australian Securities and Investment Commissions (ASIC) made on Friday the 23rd of October 2020, the regulator confirmed a decision to introduce product intervention measures that will most notably restrict how much leverage can be offered to retail traders. 

As per the media release published on ASIC’s website, the new measures outlined in the ‘Product Intervention Order—Contracts for Difference’ will come into effect from the 29th of March 2021. Brokers and their traders have just five months to adopt the new changes.

ASIC first announced interest in exercising product intervention methods in August 2019, when the regulator issued a consultation paper on proposed limitations on CFDs.

ASIC Product Intervention Measures on CFDs

Currently, most brokers in Australian offer leverage of 1:500. However, once these product intervention methods come into force in 2021, the maximum leverage will be capped at 1:30. Leverage could be even lower for some asset classes. Here are the leverage changes that must be complied with by ASIC regulated forex brokers; 

  • 30:1 for a major currency pair
  • 20:1 for a minor currency pair, gold or a major stock market index
  • 10:1  for a commodity (other than gold) or a minor stock market index
  • 2:1 for crypto-assets
  • 5:1 for shares or other assets

In the original consultation from 2019 (CP 332), ASIC has proposed capping leverage at 1:20 for all forex pairs and 1:15 on all stock index CFDs to simplify measures. However, it seems like ASIC has adopted a European-style approach that is closely aligned with the European Securities and Markets Authority (ESMA) product intervention measures which were introduced in 2018. 

Feedback on the ASIC leverage cap

During the consultation period, ASIC received over four-hundred responses from traders, brokers, law firms and even trading platform developers. Much of the feedback was constructive. Many respondents felt as though leverage was not the primary factor causing losses for retail clients. Many respondents provided information, opinions, and proposed alternative suggestions to protect retail clients and the industry.

On ASIC’s website, 21 submissions from companies and 331 submissions from individuals can be read. Many individual responses emphasised that cutting leverage would devastate their livelihoods as they relied on leverage to gain meaningful exposure to the market. For many traders, less leverage means they can no longer open positions large enough to cover their living expenses, as they do not have enough capital to trade large enough position sizes to earn an adequate amount from their trades.

Why CFDs came under scrutiny in Australia

In the first seven months of 2019, ASIC received just over 3,000 complaints about binary options and CFD products, which was significantly more than in previous years. In 2018, the commission received less than 1,000, and in 2017, the commission received less than 500. 

Besides the number of complaints received, the regulator is concerned over the profile of the customers who typically trade CFDs. The consultation paper published by ASIC stated that 99% of the clients of Australian forex, CFD and binary options providers were classified as retail investors. 32% of all clients had an annual income of $37,000 or less. This demographic profile highlights that most CFD traders are not in a position to trade highly leveraged and speculative products. To make matters even more concerning, brokers in Australia had earned an eye-watering $1.5 billion in gross revenues from CFDs. 

While ASIC was still considering feedback on the proposed product interventions, the COVID-19 pandemic occurred and sparked drama in the markets. During March and April 2020, ASIC took a sample of 13 CFD brokers and noted their retail clients made a net loss of more than $774 million during the five weeks of volatile.

Heavy losses sustained by retail clients trading in highly leveraged CFDs and ongoing market volatility during the COVID-19 pandemic highlight the need for stronger CFD protections in the product intervention order.

ASIC Commissioner Cathie Armour

Will these measures protect forex and CFD traders?

Many critics expected that the sweeping measures introduced in Europe by ESMA triggered a knock-on effect of traders migrating to brokers operating under other regulatory frameworks. ASIC stated that a mass migration of retail traders previously trading with EU-regulated brokers could have been the cause of a 121% increase in accounts with Australian brokers between 2017 and 2019. 

Those same critics now expect that traders will have no other choice but to seek offshore brokers that are in a position to provide higher leverage. The major downside to this is a lower degree of consumer protection if any at all. Being pushed towards weaker forex regulation can have implications for brokers, traders and nations.