On April 6, 2022, ASIC released the ASIC companies (Extension of Product Intervention Order – Contracts for Difference) Instrument 2022/259 (Extension Tool), which extends the conditions for issuing and distributing contracts for difference (CFDs) until May 23, 2027.
What do you want to know
- ASIC has extended the operation of ASIC Corporations (Product Intervention Order – Contracts for Difference) Instrument 2020/986 (Product Action Order) after stating that it has seen a substantial reduction in the harm caused to retail clients by trading CFDs after its introduction.
- ASIC says the extension instrument ensures that CFD protections in Australia remain in line with those in place in comparable overseas jurisdictions.
- No changes have been made to the Product Intervention Order despite industry feedback on its effectiveness, including leverage ratio limits.
What do you need to do
- Continue to comply with the conditions imposed by the Product Intervention Order when applicable to your business.
- Review the impact of the Product Intervention Order on your business and whether additional steps need to be taken to ensure your continued compliance with the conditions it imposes.
As of March 2021, the issuance and distribution of CFDs is subject to various restrictions as contained in the Product Intervention Order.
The Product Intervention Order aimed to reduce the risks to retail clients associated with CFD trading, including imposing leverage limits, margin closeout requirements and prohibiting CFD product features and selling practices that ASIC considered amplifying CFD losses borne by retail clients. For a full summary of the conditions imposed by the Product Intervention Decree, please see our previous Financial Services Update.
With the Product Intervention Order set to expire on May 23, 2022, ASIC released Consultation Paper 348: CFD Commodity Action Order Extension (PC 348) at the end of 2021. CP 348 summarized ASIC’s analysis of the impact of the Product Intervention Order on reducing harm to retail clients from CFD trading and invited comments of the industry on its proposal to extend the terms of issuance and distribution of CFDs until the Product Intervention Order is revoked.
ASIC noted that it had seen significant improvements in a number of key metrics and indicators of retail customer detriment from CFD trading in the three months following the implementation of the intervention order. on the products. In particular, ASIC found that:
- retail customer losses had decreased significantly;
- greater parity had been achieved between profits and losses in CFD trading;
- the number of active retail client accounts and the gross value of open CFD positions each decreased significantly;
- the proportion of retail clients experiencing margin closeouts or entering negative account balances had both decreased; and
- incentives were increasingly offered to wholesale customers, with the value of benefits offered to retail customers declining significantly.
It was also pointed out in CP 348 that regulatory compliance costs for licensed CFD issuers were significantly lower than expected.
ASIC ultimately concluded that these findings substantiated its proposal to keep the Product Intervention Order in effect, with industry comment on the duration of the extension. In this regard, ASIC said it did not believe a temporary extension would be appropriate, noting that it would create unnecessary regulatory uncertainty and additional regulatory burden for CFD issuers and retail clients.
Response to consultation
ASIC received 49 submissions in response to CP 348, these are summarized in Report 724: Response to Bids on CP 248 Extension of Action Order on CFD Products (REP 724).
The majority of respondents did not support the proposal to extend the Product Intervention Order, with the industry specifically questioning the impact of leverage ratio limits. That said, most respondents were supportive of the other aspects of the Product Intervention Order, including margin close-out protection, negative balance protection, and the ban on inducements.
Given the feedback from the consultation, ASIC nevertheless deemed it appropriate to extend the Product Intervention Order without modification for a period of five years. The additional data analysis that was conducted after the publication of CP 348 was cited by ASIC as one of the main reasons for this decision, which confirms its initial view that the intervention order on products was achieving its objectives effectively and efficiently.
Result and extension
ASIC has extended for five years until May 23, 2027 the Product Intervention Order imposing conditions on the issuance and distribution of CFDs. No changes were made to the Product Intervention Order.