ASIC pushing for Greater Transparency from OTC Providers

August 13, 2009Andy No Comments »

Australia – ASIC has issued its first warning targeted to the multi-billion-dollar OTC (over-the-counter) market by issuing a paper seeking more disclosure from the industry and warning investors to ask more questions.

Its aim is to educate both issuers and investors in such products as contracts for difference that client money is not as safe as some might assume. It follows the high-profile collapse of several local broking firms like Tricom in the wake of the global financial crisis, where investors might not be aware that money left with the issuer to cover margin calls may be used – quite legally – to satisfy other customer accounts.

Some $350 million is held in CFD and other derivative margin accounts and while no one has failed to get money out when they wanted to, ASIC is worried it may happen. This means it is seeking better disclosure from the industry and urging more questions from investors so they know exactly what they are getting into.

The Australian Securities and Investments Commission (ASIC) has called for better disclosure of the use of client funds by financial service licensees dealing in OTC derivatives, such as CFDs.

“A shortfall could arise if the issuer used the money for trading for another client but could not obtain that money from the other client or cover it from its own funds,” the regulator said in a statement.

“A shortfall could also arise if the issuer uses money for its own purposes and then becomes insolvent.”

In the meantime, the ASIC recommended that retail investors trading in contracts for difference or derivatives seek clarity from their issuer on how their money was looked after – including whether it can be used to meet the trading obligations of other clients, or for the firms’ own purposes.

IG Markets Australia chief executive Tamas Szabo said he welcomed the ASIC move as it would give some integrity to the CFD industry by addressing an issue that was unique to Australia.

“In the UK we were never allowed to use client funds for our own purposes, whereas in Australia it was quite unique that we were,” he said.

“We do not use client funds to meet trading obligations and we do not use client funds for our own purposes unlike other CFD providers,” he said.

CFDs were introduced into the Australian market in 2002 by global players IG Markets and rival CMC Markets and are a small but rapidly growing segment of the local trading market.

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