How will markets react to ASIC’s binaries ban and CFDs restriction?


How will markets react to ASIC's binaries ban and CFDs restriction?

Two weeks back, the Australian Securities and Investments Commission (ASIC) released a consultation paper, which suggested that, since all other measures had failed to curb extraordinary losses caused by binary options and to a lesser extent by CFDs, the agency intended to ban binary options and severely restrict the use of CFDs. The measures were necessary to protect Australian citizens and respond to ever growing complaints. It would first listen to the responses from interested parties, but comments needed to be filed by the 1st of October.

The announcement came as a bit of surprise, in that ASIC had taken its time to reach a decision, which other major regulators had already proposed, implemented, and are now dealing with the consequences, both positive and negative. Agencies in the U.S. and Canada never endorsed binary options, unless traded on a regulated exchange, and CFDs never qualified as a “security” under local law. ESMA in the EU and the FCA in the UK have both instituted bans and restrictions in a similar fashion, as what ASIC has proposed, along with new rules to halt aggressive marketing practices by brokerages.

Will the market reactions be any different in Australia than in other developed economies of the world?

At this point, we can only speculate. The strange part of this exercise is that Australian brokers have benefited from a migration of clients from these other regions that have imposed heavy clampdowns. ASIC appears to want to protect its own citizens from the high casualty rates of these products, but at present, the latest figures for domestic use, although an estimate at this time, are only 17%. A full 60% come from other countries in Asia, and one-third of that amount, some 21%, reside in China.

When ASIC published its paper, there were a flurry of articles, but none of the authors put forth any theories as to why the Aussies had delayed taking these actions, when others had seen the need and acted, some say overreacted, to the issues at hand. Asian countries tend to be far apart, but also heavily dependent on oceanic trade with their local partners. Foreign exchange spreads tend to be tighter, with more professionals as a result tending to the administration of a well operating industry. In other words, they may know the business better than other counterparties. They had decided to delay to see if they could manage the process better, while gaining outcasts from abroad.

Managing the process well apparently went awry. James Shipton, the new chairman of ASCI, assumed his duties in January of 2018. Perhaps, this initiative is of his making, but the facts speak for themselves. A report from 2017 highlighted casualty rates for binary options at 80% and CFDs at 73% for non-forex pairs. In the past two years, the users of these products doubled. Australian clients lost $490 million trading digital options last year, and complaints, which were only 500 in 2015, are already over 3,000 for the first two quarters of 2019. Leverage at “500:1” was cited as a major problem, as were excessive marketing methods, which will be restricted, as well.

Consequently, the consultation paper was quite specific:

Our proposed product intervention will effectively mean that binary options will no longer be lawfully available for acquisition by retail clients in Australia. We expect that this strong measure will reduce harms suffered by retail clients resulting from binary options.

Cathie Armour
Cathie Armour, ASIC

As for CFDs, the paper was a bit more conciliatory. ASIC Commissioner Cathie Armour noted to ABC investigators:

Our proposed product intervention will effectively mean that binary options will no longer be lawfully available for acquisition by retail clients in Australia. We expect that this strong measure will reduce harms suffered by retail clients resulting from binary options.

Subsequently, the Sydney Morning Herald (SMH) reached out to John Price, another one of ASIC’s four Commissioners, for comment:

Certainly, leverage is an element of concern. The proposals are in no way inconsistent with what a whole raft of regulators all around the world are doing. There are a number of overseas jurisdictions that have put in place similar measures to the ones that we are consulting on now.

Leverage would be ratcheted back from 500:1 to 20:1 for non-stock CFDs, 15:1 for stocks.

What will the market consequences be for these actions?

After witnessing similar crackdowns spread from the U.S. market, then to Europe, and now to the land down under, speculation is already suggesting that the historical record will provide the roadmap for what is to come. Financial markets today are global and very inter-connected. If you attempt to “squeeze the balloon” in one region too harshly, clients and brokers will adapt by moving to more accommodating locales.

The first consequence is already in motion, so to speak. As ASIC determined, more than a majority of each broker’s book of clients is heavily weighted offshore. Brokers are already reorganizing and forming subsidiaries in overseas markets like the Seychelles or Belize, where they intend to move their lucrative China business and the contacts with broad based networks of Introducing Brokers (IB), the primary client acquisition method employed in the region. High leverage is a major draw and will continue to be outside of ASIC’s jurisdiction, and as long as customer casualty rates remain high, there will always be pressure on marketing departments to deliver fresh new clients.

How about clients – will they pack up and find a new overseas broker to deal with? If we look at the Europe example, CMC Markets, Plus500 Ltd and the IG Group lost overseas clients when they had to institute new leverage limits. Each firm, however, moved swiftly to encourage clients to transfer to their Australian subsidiaries. CMC has disclosed that 31% of its revenues come from its Australian operations. Plus 500 states that Australia now accounts for 15% of its turnover, but do they already have subsidiaries in the Seychelles or Singapore?

The jury is still out on this issue of client attrition to an unknown overseas provider. Asians are more than educated as the fraud aspects of dealing with an unregulated, offshore broker. Losses have been legendary, and the word has spread. There is another issue, too. Australia may benefit from what some have termed the “Halo Effect”. Brokers in Australia have established a hard-earned reputation for being extremely professional and upholding very high ethical standards. As a result, there is an argument that claims that customer loyalty in the region runs high. When faced with similar actions in the past, customers have increased their deposits and traded more often.

The SMH reporters quizzed a local industry executive, who wish to remain anonymous, on this very issue:

I doubt it would stop smaller traders from trading, but they may adapt their trading behaviour and hold more money on their account. I really hope an unintended consequence of these measures isn’t to simply push Australian clients offshore.

The executive went on to say:

In Australia, we have robustly regulated firms, fully authorised and accountable to ASIC that are offering this product in a responsible way. When a client goes offshore they lose many of these important protections and I would encourage Australian traders to continue to trade with properly regulated Australian firms and think very carefully (particularly of the risks) before going offshore.

What else will Aussie brokers do? Local observers expect brokers to put pressure on ASIC to raise the proposed leverage levels to something more reasonable and to stretch out implementation timeframes. Individual traders may switch to riskier offshore platforms, but ASIC should not go out of its way to motivate customers to relocate. Implementing new rules when disparate technological infrastructures are involved requires more time and testing before bringing chaos to an existing marketplace.

Paul Derham, partner at Holley Nethercote, a commercial financial services law firm that has represented many CFD brokers, told SMH that:

The leverage proposals are harsher than those imposed in other jurisdictions. And with significant technology change required to meet real-time exposure requirements, the 30-day to three-month timeline for any introduction of the proposals is inadequate.

Concluding Remarks

Losses from binary options have left a bad taste in every regulator’s mouth across the planet, but their existence lives on in far away exotic markets, where few should tread. As for CFDs, their popularity arose after the crackdown on binaries occurred. Although the industry prefers to call CFD activity “speculative trading”, many in the regulatory camp still regard them as nothing more than “online gambling”. Instituting rules to curb the desire of people to gamble have rarely succeeded. As always, an ignorant trader will gamble, and an informed one will trade. Let the market sort them out.

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How will markets react to ASIC's binaries ban and CFDs restriction?

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