ASIC introduced a product intervention order (Order) in October 2020, imposing restrictions on the issue and distribution of contracts for difference (CFDs) to retail investors. This decision came after the regulator’s finding that CFDs have resulted in, and are likely to result in, significant detriment to retail investors. The Order will expire on 23 May 2022 unless it is extended. ASIC has proposed to extend the Order in Consultation Paper 348 based on the positive results from the assessment of the Order’s effectiveness in terms of reducing the risk of significant detriment to these investors.
How did ASIC assess the impact of the Order?
ASIC obtained certain data from 59 licensed retail CFD issuers over a 15-month period that spanned the period before (1 April 2020 – 28 March 2021) and after (29 March 2021 – 30 June 2021) the implementation of the measures in the Order, by way of issuing a s912C notice.
The data collected included client categories, details of client numbers, the gross notional exposure of CFDs issued and metrics on client outcomes such as profit- and loss-making accounts, margin close-outs and negative balances.
ASIC not only analysed this data but also further investigated where any data appeared improbable or incorrect and requested the CFD issuers to revise or resubmit their data. ASIC also compared the data against other sources of information, including the retail client money reporting data provided by CFD issuers under the ASIC Client Money Reporting Rules 2017 and information gathered in their previous interactions with CFD issuers. Even though ASIC didn’t specifically mention in the CP348 whether they used any derivatives data reported under ASIC Derivative Transaction Rules (Reporting) 2013 in their data analysis, it is likely the regulator cross-checked the data in relation to gross notional values of CFDs issued against the data provided directly by the CFD issuers in the schedule B of s912C notice.
We also note that ASIC previously introduced a requirement for CFDs to be reported using the lifecycle method rather than just the snapshot method to aid this type of analysis.
Impacts of the Order on Retail Investors
The result from the data analysis shows the following observations including, but not limited to:
- reduction in aggregate and average retail investor losses and profits by 94%;
- reduction in the proportion of retail investor profit-making vs loss-making accounts (from 34:64 to 50:50);
- decline in the number of retail investors;
- reduction in gross notional value of CFDs issued to retail investors by at least 75%;
- significant reduction in the number of retail accounts experiencing at least one margin close-out;
- substantial reduction in occurrences where a retail investor enters into a negative balance; and
- significant decrease in the value of benefits given to retail investors as a result of the prohibition against giving or offering certain inducements to them.
With a substantial reduction in detriment to retail clients resulting from CFD trading, ASIC has confirmed the effectiveness of the Order. Therefore, ASIC has required CFD issuers to provide the relevant data for the period from 1 July 2021 to 30 September 2021 to continue to monitor and assess the effectiveness of the Order.
It’s important that you provide accurate data to the trade repository or your reporting delegate for the daily trade reporting as well as supply the correct data in schedule B of s912C notice to ASIC. TRAction has identified that reporting wrong notional amount as one of the most common errors made in trade reporting. Read our article to find out how to fix this error you if identified in your reporting. If you have any concerns, please feel free to contact our team.