The Australian Securities and Investments Commission (ASIC) announced on Wednesday that it has extended its product intervention order for retail issuance and distribution of contracts for differences (CFDs) for a further five years, until May 23, 2027.
The Aussie regulator initially brought these restrictive conditions on the CFDs investment instruments on March 29, 2021. But initially, those rules were only effective for 18 months, which the regulator considered to be a trial period.
The conditions of ASIC include the leverage
Leverage
In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage.
In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage.
Read this Term limitation of up to 30:1, standardization of margin close-out rules, and negative balance protection
Negative Balance Protection
Negative Balance Protection is a term and process adopted by forex brokers and financial regulators to protect investors and traders from excessive losses. Negative Balance Protection is not a marketing term but an actual service provided in investing and trading. This ensures that traders with losing positions don’t end up with a negative balance in their forex trading account. If you find yourself in a bad trade and are losing money fast, a margin call can save you from going into debt. Before 2011 there was no protection for traders in finance when there was a rush in the marketplace, and positions could not be closed. Negative balance protection became more critical after the Swiss franc crisis in 2015 when the Swiss National Bank (SNB) stopped holding its currency against the EUR at a fixed currency rate. The Swiss franc rapidly strengthened against the EUR, and a lot of traders shorting the franc ended up with substantial negative balances. They lost more than they had on their account. Several investment houses and brokers were forced into liquidation. Leverage trading increases the traders’ exposure. Benefits of Negative Balance ProtectionNegative balance protection means that you cannot lose more than the funds you have on deposit. This is a precautionary measure that brokerage firms take to safeguard their clients. A negative balance protection policy ensures that traders will not lose more money than deposited if their account goes into negative as a result of their trading activity. This means that if a trader chooses a brokerage firm that offers negative balance protection, he won’t owe money to the firm because of a wrong trading decision. The ESMA reformed its financial governance framework, after the financial crisis that hit it at the end of 2009. European financial regulators are trying, through the implementation of new rules, to protect consumers in their dealings with financial firms.
Negative Balance Protection is a term and process adopted by forex brokers and financial regulators to protect investors and traders from excessive losses. Negative Balance Protection is not a marketing term but an actual service provided in investing and trading. This ensures that traders with losing positions don’t end up with a negative balance in their forex trading account. If you find yourself in a bad trade and are losing money fast, a margin call can save you from going into debt. Before 2011 there was no protection for traders in finance when there was a rush in the marketplace, and positions could not be closed. Negative balance protection became more critical after the Swiss franc crisis in 2015 when the Swiss National Bank (SNB) stopped holding its currency against the EUR at a fixed currency rate. The Swiss franc rapidly strengthened against the EUR, and a lot of traders shorting the franc ended up with substantial negative balances. They lost more than they had on their account. Several investment houses and brokers were forced into liquidation. Leverage trading increases the traders’ exposure. Benefits of Negative Balance ProtectionNegative balance protection means that you cannot lose more than the funds you have on deposit. This is a precautionary measure that brokerage firms take to safeguard their clients. A negative balance protection policy ensures that traders will not lose more money than deposited if their account goes into negative as a result of their trading activity. This means that if a trader chooses a brokerage firm that offers negative balance protection, he won’t owe money to the firm because of a wrong trading decision. The ESMA reformed its financial governance framework, after the financial crisis that hit it at the end of 2009. European financial regulators are trying, through the implementation of new rules, to protect consumers in their dealings with financial firms.
Read this Term. The most impactful restriction remained the limitation on leverage, which was also in line with similar restrictions imposed by the European financial market regulator in 2018.
Protecting the Retail Traders
ASIC extended the product intervention order period after imposing them for more than a year. It highlighted that there was a 91 percent reduction in aggregate net losses by retail client accounts. Also, there were 51 percent fewer loss-making retail client accounts per quarter on average.
Its latest decision was also influenced by an 87 percent fall in margin close-outs, along with an 87 percent reduction in negative balance occurrence for retail clients.
“We have seen a substantial reduction in harm to retail clients resulting from CFDs as a result of ASIC’s product intervention,” ASIC’s Commissioner Cathie Armour said in a statement.
“Our extension of the product intervention order for five years will ensure that the leverage ratio limits and other protections can continue to reduce the size and speed of retail clients’ CFD losses. These consumer protections are more important than ever during volatile market conditions.”
The Aussie financial market supervisor also imposed an 18-month ban on the retail sale and distribution of the controversial binary options. It was also imposed last year, citing that around 80 percent of the retail traders dealing in binary options lose money.
The Australian Securities and Investments Commission (ASIC) announced on Wednesday that it has extended its product intervention order for retail issuance and distribution of contracts for differences (CFDs) for a further five years, until May 23, 2027.
The Aussie regulator initially brought these restrictive conditions on the CFDs investment instruments on March 29, 2021. But initially, those rules were only effective for 18 months, which the regulator considered to be a trial period.
The conditions of ASIC include the leverage
Leverage
In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage.
In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage.
Read this Term limitation of up to 30:1, standardization of margin close-out rules, and negative balance protection
Negative Balance Protection
Negative Balance Protection is a term and process adopted by forex brokers and financial regulators to protect investors and traders from excessive losses. Negative Balance Protection is not a marketing term but an actual service provided in investing and trading. This ensures that traders with losing positions don’t end up with a negative balance in their forex trading account. If you find yourself in a bad trade and are losing money fast, a margin call can save you from going into debt. Before 2011 there was no protection for traders in finance when there was a rush in the marketplace, and positions could not be closed. Negative balance protection became more critical after the Swiss franc crisis in 2015 when the Swiss National Bank (SNB) stopped holding its currency against the EUR at a fixed currency rate. The Swiss franc rapidly strengthened against the EUR, and a lot of traders shorting the franc ended up with substantial negative balances. They lost more than they had on their account. Several investment houses and brokers were forced into liquidation. Leverage trading increases the traders’ exposure. Benefits of Negative Balance ProtectionNegative balance protection means that you cannot lose more than the funds you have on deposit. This is a precautionary measure that brokerage firms take to safeguard their clients. A negative balance protection policy ensures that traders will not lose more money than deposited if their account goes into negative as a result of their trading activity. This means that if a trader chooses a brokerage firm that offers negative balance protection, he won’t owe money to the firm because of a wrong trading decision. The ESMA reformed its financial governance framework, after the financial crisis that hit it at the end of 2009. European financial regulators are trying, through the implementation of new rules, to protect consumers in their dealings with financial firms.
Negative Balance Protection is a term and process adopted by forex brokers and financial regulators to protect investors and traders from excessive losses. Negative Balance Protection is not a marketing term but an actual service provided in investing and trading. This ensures that traders with losing positions don’t end up with a negative balance in their forex trading account. If you find yourself in a bad trade and are losing money fast, a margin call can save you from going into debt. Before 2011 there was no protection for traders in finance when there was a rush in the marketplace, and positions could not be closed. Negative balance protection became more critical after the Swiss franc crisis in 2015 when the Swiss National Bank (SNB) stopped holding its currency against the EUR at a fixed currency rate. The Swiss franc rapidly strengthened against the EUR, and a lot of traders shorting the franc ended up with substantial negative balances. They lost more than they had on their account. Several investment houses and brokers were forced into liquidation. Leverage trading increases the traders’ exposure. Benefits of Negative Balance ProtectionNegative balance protection means that you cannot lose more than the funds you have on deposit. This is a precautionary measure that brokerage firms take to safeguard their clients. A negative balance protection policy ensures that traders will not lose more money than deposited if their account goes into negative as a result of their trading activity. This means that if a trader chooses a brokerage firm that offers negative balance protection, he won’t owe money to the firm because of a wrong trading decision. The ESMA reformed its financial governance framework, after the financial crisis that hit it at the end of 2009. European financial regulators are trying, through the implementation of new rules, to protect consumers in their dealings with financial firms.
Read this Term. The most impactful restriction remained the limitation on leverage, which was also in line with similar restrictions imposed by the European financial market regulator in 2018.
Protecting the Retail Traders
ASIC extended the product intervention order period after imposing them for more than a year. It highlighted that there was a 91 percent reduction in aggregate net losses by retail client accounts. Also, there were 51 percent fewer loss-making retail client accounts per quarter on average.
Its latest decision was also influenced by an 87 percent fall in margin close-outs, along with an 87 percent reduction in negative balance occurrence for retail clients.
“We have seen a substantial reduction in harm to retail clients resulting from CFDs as a result of ASIC’s product intervention,” ASIC’s Commissioner Cathie Armour said in a statement.
“Our extension of the product intervention order for five years will ensure that the leverage ratio limits and other protections can continue to reduce the size and speed of retail clients’ CFD losses. These consumer protections are more important than ever during volatile market conditions.”
The Aussie financial market supervisor also imposed an 18-month ban on the retail sale and distribution of the controversial binary options. It was also imposed last year, citing that around 80 percent of the retail traders dealing in binary options lose money.
Source: https://www.financemagnates.com/forex/regulation/asic-extends-leverage-restrictions-on-cfds-for-another-five-years/