Since the introduction of ASIC’s product intervention powers in April 2019, binary options and contracts for difference (CFDs) have been the subject of scrutiny by ASIC.
As previously reported in our papers titled ‘Binary options and CFDs: first targets for ASIC’s new product intervention powers?’ and ‘Short term credit, binary options and CFDs: ASIC names and shames initial targets of its product intervention powers’, ASIC now has the power to intervene with financial products if they have resulted in or are likely to result in significant detriment to consumers.
ASIC recently formalised its proposal to ban the issue of binary options to retail clients and impose restrictions on the issue of CFDs1 by making intervention orders in respect of each of these products.
Ban on binary options
To recap: binary options involve staking an amount on the outcome of an event with an ‘all or nothing payoff structure’ (for example, the price of a certain financial product increasing or decreasing over a specified time period).2 If a retail client selects the wrong outcome, they lose the entire amount that they invested. The risk of cumulative losses is exacerbated by the fact that many binary options arrangements involve short-term contracts with a duration of as little as a few minutes.3 ASIC found that ‘approximately 80% of retail clients lost money trading binary options’ in 2017 and 2019, and it also estimated that retail clients incurred binary option trading losses of approximately $490 million in 2018.4 In the circumstances, ASIC concluded that ‘binary options have resulted in and are likely to result in significant detriment to retail clients’.5
Consequently, to address its conclusions as to:
- the inherently risky and speculative nature of binary options as a financial product;6 and
- the statistical evidence that binary options have resulted in significant losses to retail clients over several years,7
ASIC has now banned their issue to Australian retail clients.
Specifically, the ASIC Corporations (Product Intervention Order—Binary Options) Instrument 2021/240 (Binary Options Instrument) prohibitions took effect on 3 May 2021.8 The Binary Options Instrument:
- prohibits binary option issuers from issuing binary options to retail clients (s 5); and
- imposes an obligation on any binary option issuers that issued a binary option to a retail client within the 12 months prior to the commencement of the instrument, to take reasonable steps to notify those retail clients of the instrument within 15 business days after commencement of the instrument (s 6).
Restrictions on retail trading of CFDs
ASIC reviews found that the majority of retail CFD traders lost money on their investments in 2017, 2019 and 2020.9 ASIC also found that
‘during a volatile five-week period in March and April 2020, the retail clients of a sample of 13 CFD issuers made a net loss of more than $774 million’.10
As with binary options, therefore, ASIC found that CFDs have resulted in and are likely to result in significant detriment to retail clients.11
Consequently, the ASIC Corporations (Product Intervention Order—Contracts for Difference) Instrument 2020/986 (CFDs Instrument) conditions took effect on 29 March 2021.12 The CFD Instrument imposes a number of conditions on dealings with CFDs in relation to retail clients including:
- limits on the maximum leverage available to retail clients, which now ranges from 30:1 to 2:1 depending on the asset class (s 7), whereas prior to the instrument, the leverage could be as high as 500:1.13 These leverage ratio limits are aimed at minimising retail client exposure ‘to reduce the size and speed of retail clients’ losses’;14
- standard close out margins to protect investment levels (s 7);
- a negative account balance protection (s 7); and
- a prohibition on inducements i.e. giving benefits to retail clients such as trading credits, rebates, discounts or free gifts for trading of CFDs (s 6).
Additionally, if a CFD issuer previously issued a CFD to a retail client within the 12 months prior to the commencement of the instrument, and that CFD would now be covered by the CFD Instrument, then the issuer was required to take reasonable steps to notify that retail client of the instrument within 10 business days after the commencement of the instrument (s 8).
Where to from here?
The ban on binary options for retail clients and the restrictions on retail trading of CFDs mirror the protections introduced in some other overseas financial markets. While both product intervention orders will remain in force for 18 months, it is not yet certain whether the orders will be made permanent or extended when they reach expiry.
1 ASIC Paper CP 322 ‘Product Intervention: OTC binary options and CFDs’, 22 August 2019.
2 ASIC Media Release ‘21-064MR ASIC bans the sale of binary options to retail clients’, 1 April 2021.
3 Investment Warnings: Binary Options, Moneysmart (available at https://moneysmart.gov.au/investment-warnings/binary-options)
4 ASIC Media Release 21-064MR ‘ASIC bans the sale of binary options to retail clients’, 1 April 2021.
9 ASIC Media Release ‘20-254MR ASIC product intervention order strengths CFD protections’, 23 October 2020.
12 ASIC News Item ‘Read this before trading CFDs’, 11 November 2020.
13 SAI Global Corporate Law Bulletin No. 284 at 2.5,
14 ASIC Media Release ‘20-254MR ASIC product intervention order strengths CFD protections’, 23 October 2020.
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