ASIC seeks to tighten rules around CFDs and margin forex

retail-investors/government-and-regulation/australian-financial-services/cash-flow/australian-securities-and-investments-commission/

10 May 2011
| By Caroline Munro |

The Australian Securities and Investments Commission (ASIC) has proposed a tightening of the rules around the financial requirements for issuers of over-the-counter derivative products.

ASIC stated that a review of over-the-counter (OTC) derivative products, such as contracts for difference (CFDs) and margin foreign exchange, came about as a result of the increase in interest from retail investors. ASIC stated that in light of this growth it wanted to ensure that issuers had adequate financial resources to manage their operating costs and risks, and that the owners of issuers were committed to the viability of the business.

“Increasing numbers of mum and dad investors are trading in these complex and risky products and it’s important the interests of all parties are aligned,” said ASIC commissioner, Greg Medcraft (pictured).

“We want issuers to be required to address operational risks with good cash flow forecasting and by holding sufficient liquid funds against losses and expenses that could arise from these risks.”

ASIC’s proposed changes include the requirement that issuers create rolling 12-month cash flow projections, and replacing the current requirements to hold surplus and adjusted surplus liquid funds with the requirement to hold net tangible assets of at least the greater of $1 million or 10 per cent of average revenue.

CFD provider Capital CFDs has welcomed the proposed changes, stating that retail investors would ultimately benefit. Capital CFDs managing director, Andrew Merry, said ASIC’s proposals were in step with the issue of segregated client funds, adding that issuers being sufficiently capitalised had the added benefit of providing retail investors with greater confidence.

“Currently, under the Corporations Act, Australian financial services licensees dealing in OTC derivatives are legally allowed to use client funds to hedge positions,” said Merry. “This sends a confusing message to trading clients and we have long advocated for change in the law.”

He added that the proposed changes would create a level playing field among issuers and align Australia with global standards.

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