Australia, ASX urges ASIC to tighten broker rules

January 31, 2011Andy No Comments »

The Financial Ombudsman Service, in a report to the Australian Securities and Investments Commission, has urged the commission to increase protection for investors in CFDs. The commission plans to introduce new requirements for CFD providers this year, but the ombudsman has called for more stringent minimum standards that would restrict CFD providers from allowing unexperienced clients to trade in the derivative products.

In addition to financial services providers such as collapsed firms Storm Financial, Lift Capital and Sonray Capital, operators of dark liquidity pools should also be regulated more strictly, ASX Ltd said.

Meanwhile, failure to extend rules to cover contracts for difference and CFD providers may provide brokers incentives to target customers who want to play around the rules that would apply to shares, the bourse operator said.

‘ASX would back efforts by the Australian Securities and Investments Commission to submit regulatory overhauls to expand the potential class of persons and products falling under Market Integrity Rules,’ ASX Ltd said in a submission to the regulator.

‘This may be necessary to make sure that substitute products are covered to prevent regulatory arbitrage and consequential undermining of the regulatory objective sought to be achieved by ASIC’s rules.’

ASIC is understood to be releasing a new regulatory guide in March that will detail nine new disclosure benchmarks for CFD providers in response to concerns about the risks faced by retail investors trading in CFDs.

New Australian CFD provider Capital CFDs stated the corporate watchdog, ASIC, needs to go further with proposed measures to improve the CFDs trading environment in Australia.

‘We fully and strongly endorse ASIC’s proposed benchmarks in respect to client suitability and the protection of client funds,’ Andrew Merry, Capital CFDs’ Managing Director, said. ‘On the issue of client suitability, Capital CFDs maintains that CFDs are specialised trading instruments that are not suitable for all investors’

‘We apply tight financial checks and carry out thorough tests of customers’ knowledge of trading products such as stocks, contracts for differences, foreign exchange and options, which may lead to some not being permitted to create an account or result in some clients being directed to our demo platform before revaluating their suitability for trading.’

Capital CFDs is, however, worried about the disparity between ASIC’s efforts to set guidelines that protect investors’ money and the present conditions that, under the Corporations Act, Australian financial services licensees dealing in OTC derivatives are legally permitted to utilise client funds to hedge trading positions.

‘This clause is ambiguous and sends a contradictory message to private traders. The Corporations Act should be amended to prevent providers from using client money to fund their positions, especially if the Australian Securities and Investments Commission really wants to tackle the risks faced by private traders,’ Mr Merry said.

‘The protection of client money and assets to be a fundamentally important part of regulation. Clients monies should be put in a separate fully segregated bank account to guarantee investors’ deposits and trading profits are fully safe and separate and are not pooled to cover company positions.’ ‘It is crucial that ASIC comes up with a fair and level playing field and we would expect that the introduction of these new benchmarks will help towards improving customer disclosure and operational risks.

‘Private investors need to be aware they are in possession of the most thorough and up-to-date information to hand, including clear instructions to guide them make an informed decision on whether CFDs are an appropriate product for them, as well as knowing their funds are secure,’ Mr Merry was quoted saying. ‘Clients deserve to know that what they see is what they get, with no hidden surprises. Making the rules tighter will be vital to this process’.

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