ASIC's guide for CFD issuers

ASIC has released a regulatory guide for contracts for difference (CFD) issuers in order to provide greater disclosure to investors.

The guide, entitled "Over-the-counter contracts for difference: Improving disclosure for retail investors", provides seven benchmarks for which CFD issuers are to adhere.

The benchmarks include client qualification, opening collateral, hedging, financial resources, client money, suspended or halted underlying costs, and margin calls.

As part of addressing each of the benchmarks stipulated in the guide, issuers must provide a detailed explanation of their policies and practices when trading.

For example, one of the standards requires the issuer to disclose whether they hold sufficient liquid funds to withstand significant adverse market movements.

ASIC said most CFDs are issued as over-the-counter (OTC) products, making them increasingly accessible to retail investors.

The regulatory body warns that because of this, many investors may not be aware of the high-risk nature of CFDs.

"Most investors don't understand the complexity of CFDs, and they don't get independent financial advice," said ASIC chairman Greg Medcraft.

"That means we need CFD issuers to do a much better job of spelling out to investors the risks, as well as the rewards of these complex products.

"We want issuers to work harder to ensure people investing in CFDs better understand what they are getting into - before they start trading," he said.

 The guide requires CFD issuers to either address each of the seven benchmarks or provide an 'if not, why not' explanation in their products disclosure statements.

According to Investment Trends' 2010 Australian CFD Report, there are currently 39,000 active CFD investors in Australia.

ASIC said the CFD market has seen growth of over 300 per cent in the past 5 years, and it is reasonable to assume that this growth will continue.