Australia, ASIC releases Investor Guide about CFDs Trading

November 25, 2010Andy No Comments »

Just a week after expressing concern about consumer understanding of over the counter products such as CFDs, the Australian regulator has issued a 45-page investor guide aimed at helping private investors thinking about dealing in CFDs.

The guide aims to provide retail investors, with clear, concise and independent advice on the workings of contracts for difference (CFDs) work and the risks that are attached to CFDs which it describes as a ‘highly-leveraged derivatives product’.

The ‘Thinking of Trading Contracts for Difference?’ guide explains in detail why retail investors should think carefully before trading margined products. and should only deal in CFDs if they already have past trading experience or are used to trading in volatile markets and can afford to lose all of, or more than, the initial money invested.

‘Our research with CFD traders highlighted that many traders don’t know or don’t appreciate key aspects of how CFDs work, despite the fact that they are actively dealing in them,’ ASIC commissioner Greg Medcraft (pictured) said.

‘This guide aims to fill some of these knowledge gaps, especially around the trading risks.’

Greg Medcraft

Greg Medcraft said that the new guide was aimed at ensuring retail investors could make more informed decisions about CFDs and whether to deal in them.

According to Australian Securities and Investments Commission, the guide includes explanations around the workings of CFDs, how trading contracts for differences differs from investing in stocks and shares and the key questions that a retail investor should ask a CFD provider before they agree to trade in CFDs.

It also explains the different CFD provider business models, including differences between over-the-counter and exchange-traded CFDs, and common mistakes to avoid.

In the investing guide, Thinking of trading contracts for difference?, ASIC warned of a series of little-known risks facing CFD investors, including:

  • Some CFD providers not being bound to execute ‘stop-loss’ trades, therefore increasing potential losses.
  • The ability of some CFD providers to withdraw money from client accounts ‘for a wide range of other purposes’.

The guide in particular describes risks ranging from uncertainty about providers’ pricing models to risks of money in client accounts suddenly disappearing. The warnings follow a tough line adopted by ASIC in its dealings with CFD brokers, including last week’s ban on CFD TV adverts on prime-time television.

ASIC categorised the risks in four main areas:

  • leverage increasing losses when markets moved against investors;
  • a CFD provider may fail to meet its obligations;
  • investors losing ‘commingled’ money held by the CFD provider;
  • and trading irregularities such as ‘gapping’.

‘If the CFD provider’s business is concentrated with a few clients and one or more of those clients suffer trading losses which the client can’t cover, this may cause serious financial problems for the CFD company, which may then affect whether or not they can meet their obligations to you’ ASIC warned in a guide for potential investors in CFDs issued on Tuesday. In July, ASIC started a ‘risk surveillance’ of industry practices, with results likely to be released next year.

While pooling of client funds is allowed under corporate law, ASIC signalled it was worried about the practice in a discussion paper published in August last year. It is believed that the Australian Securities and Investments Commission has been scrutinising CFD providers in recent months, including examining financial records, but has stopped short of recommending the establishment of an individual account for each client.

Both CFD provider Sonray, which went into liquidation this year, and stock lender Opes Prime, which collapsed in 2008, held investors’ money in a single main account and both recorded significant shortfalls in investors’ funds after a few large clients ran into trouble.

Medcraft said last week that one of the issues considered by ASIC was the fact that most investors in CFDs did not receive independent financial advice and simply relied on information supplied by CFD issuers.

Download a copy of Thinking of trading contracts for difference (CFDs)? (pdf guide) here now. The guide can also be found on the ASIC and Fido websites.

IG Markets, one of Australia’s leading CFD Trading Providers has meanwhile responded by issuing a press release stating that it supports ASIC’s proposed introduction of disclosure benchmarks for CFD providers.

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