New requirements that come into effect in March and October 2021 require issuers of CFDs to modify their products
The ASIC Corporations (Product Intervention Order – Contracts for Difference) Instrument 2020/986, which relevantly takes effect on 29 March 2021, will require issuers of contracts for difference (CFDs) to modify their products. CFD providers also need to ready to comply with the new product design and distribution obligations, that take effect in October 2021, which require product issuers to design products that are fit for purpose and that are capable of delivering good consumer outcomes.
What you need to know
- On 23 October 2020, ASIC released the ASIC Corporations (Product Intervention Order – Contracts for Difference) Instrument 2020/986, imposing conditions on the issue and distribution of CFDs.
- The Instrument introduces new provisions regarding leverage conditions, close-out protection, negative balance protection and prohibitions on inducements.
What you need to do
- Update your disclosure documents, customer terms and IT systems in readiness for ASIC's product intervention order that materially takes effect on 29 March 2021.
- When doing so, have regard to the new product design and distribution obligations, that begin in October 2021, and which will materially impact the design and distribution of the products you offer to retail consumers.
Background
On 23 October 2020, ASIC made a product intervention order – the ASIC Corporations (Product Intervention Order – Contracts for Difference) Instrument 2020/986 (Instrument 2020/986). Its introduction is in response to consumer and industry feedback received on ASIC's Consultation Paper 322 Product intervention: OTC binary options and CFDs (CP 322) released in August 2019.
The Instrument imposes conditions on the issue and distribution of contracts for difference (CFDs) to retail clients which reflect ASIC's view that CFDs have resulted in, and are likely to result in, significant detriment to retail clients.
Key features of Instrument 2020/986 include:
- reducing CFD leverage available to retail clients;
- targeting CFD product features and sale practices which in ASIC's view amplify the CFD losses borne by retail clients; and
- bringing Australian practice in line with protections in force in comparable foreign markets.
ASIC's consideration of feedback on its proposal in CP 322 to ban the issue and distribution of binary options to retail clients is ongoing.
What are the key changes?
The Instrument will introduce provisions:
- restricting CFD leverage offered to retail clients to certain maximum ratios;
- standardising CFD issuers' close-out arrangements;
- protecting against negative account balances; and
- prohibiting giving or offering certain inducements to retail clients.
A detailed breakdown of the new provisions is set out below:
| Provision | Comments |
|---|---|
| Leverage conditions |
The leverage ratios offered to retail clients in the CFD market have been further restricted to strengthen consumer protections. Under the draft instrument, the proposed leverage ratios were as follows:
The final product intervention power has restricted CFD leverage such that from 29 March 2021, the maximum leverage ratios will be:
|
| Margin close-out protection |
The final product intervention power expands the obligation for CFD issuers to close out one or more of the open CFD positions held by a retail client before all or most of their investment is lost. It was initially proposed that CFD issuers would be required, as soon as market conditions allow, to close out their retail clients' positions where the funds in a client's CFD trading account fell to less than 50% of the total initial margin required to open these positions. Issuers will now also be required to close out these positions where a retail client holds less than 50% of the funds required to trade on their open CFD positions, if this amount is equal to or greater than the initial margin they were required to provide. |
| Risk warnings | ASIC has confirmed that they will not require any issuer-specific risk warnings or other disclosure-based conditions as were originally contemplated by CP 322. As such, the product intervention order does not include any provisions relating to these conditions. |
| Prohibited benefits | Various benefits such as gifts and rebates for clients to open an account or trade CFDs have been prohibited as originally contemplated. ASIC has now also prohibited discounts. |
When will the Instrument come into effect?
The above provisions of the Instrument will be effective from 29 March 2021. It will subsequently remain in force for 18 months, after which it may be extended or made permanent.
How do these changes interact with product design and distribution obligations?
As outlined in a previous Financial Services Update, the design and distribution obligations require:
- Issuers of regulated financial products to make a target market determination (TMD) for financial products; and
- Issuers and distributors of regulated financial products to take reasonable steps to ensure that the distribution of a product is consistent with the TMD.
Under the Instrument, entities issuing and distributing CFDs will need to take care to reflect the new conditions and restrictions imposed by the Instrument when making publicly available TMDs. Issuers should pay special attention to appropriately capturing the class of retail clients to which they will provide their services in light of the Instruments introduction.
What does this mean for your business?
Financial services and product issuers can expect increased scrutiny on their product governance processes right across the lifecycle of their offerings.
In response, issuers of CFDs should assess their client-facing documents, including product disclosure statements and client terms agreements, to ensure that they reflect the key requirements introduced under the Instrument. They should also ensure that they have appropriate IT systems and platforms in place to enable continued compliance.
CFD issuers are also required to notify existing clients of the effect of the Instrument.
Authors: Jonathan Gordon, Partner; Corey McHattan, Partner and Stephen Tudjman, Consultant.
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