New ASIC Regulations to Take Affect from March 2021
The Australian Securities and Investments Commission (ASIC) recently announced regulatory changes aimed at retail traders and contracts for difference products (CFDs).
Aimed at increasing consumer protection, the regulatory changes cover four main area which include margin close-out levels, negative balance protection, promotional offers and leverage ratios.
A retail trader is one who does not engage in financial advice, manage money for clients or trade on a professional basis. As the changes are not aimed at wholesale clients then the changes do not impact them.
If you are classified as a retail trader then the regulatory changes will affect your account from the Monday 29th March 2021.
Lower Leverage Ratios
In order to lower the risk that retail traders can take, ASIC have decided to lower leverage ratios on CFDs to retail traders. By lowering the leverage ratios, deposit requirements for some products will be higher than they currently are. For example, a market which required $100 on margin with 100:1 leverage previously will require $1000 of margin to open the same trade at 10:1 leverage from the 29th March. This change does not impact the potential profit or loss of the trade as the market’s tick or point change remains the same. But depending on the size of the initial deposit it may limit which markets some retail clients are able to trade, depending on accounts funds, margin requirements and price of the underlying security. As before, if a trader does not have the available funds in their account to cover the margin requirements then the trade will not be opened.
The above table compares current leverage ratios to the new leverage ratios which will take affect from the 29th March 2021. Below we outline ASIC’s asset classification, how this impacts the leverage and which markets it affects within our MT4 platform.
Major currency pairs:
Leverage will be lowered to 30:1 for major currency pairs. ASIC define a ‘major currency pair’ to be a forex pair from any two of the following currencies: AUD, GBP, CAD, EUR, JPY, CHF and USD.
For example, EUR/JPY, CAD/CHF and GBP/CAD would be considered to be major currency pairs with a leverage ratio of 30:1. This is worth noting because traders typically refer to ‘major pairs’ as USD/CAD, USD/CHF, USD/JPY, AUD/USD, GBP/USD, NZD/USD and EUR/USD.
Also take note that NZD is not considered as a major pair, so NZD/USD is considered as a minor currency pair with leverage being lowered to 20:1.
Minor currency pair:
Leverage will be lowered to 20:1 for minor currency pairs, which is simply any forex pair not from the major currency pair list. For example, NZD/USD, NZD/CAD, USD/ZAR, USD/TRY, EUR/NOK, EUR/SEK.
Major Stock Market Index:
Leverage for major stock market indices will be lowered to 20:1 and includes the following markets: Dow Jones Industrial Average (US30), S&P 500 (US500), NASDAQ-100 (USTEC), NASDAQ Composite Index, FTSE 100 (UK100), EURO STOXX 50 (STOXX50), DAX (DE30), CAC 40 (FR40), Nikkei Stock Average (JP225) and S&P/ASX 200 (AUS200).
As we can see in the table above, commodities refer to all commodities except gold (XAUUSD). Therefore, leverage for commodities such as silver (XAGUSD), copper (XCUUSD), corn, WTI and coffee will be lowered to 10:1. Leverage for gold will be lowered to 30:1.
Prohibition of Promotional Offers
ASIC regulated brokers will no longer be able to provide promotional offers such as gifts, referrals or trading credits.
Negative Balance Account Protection
Retail traders will not be able to lose more than their initial deposit, regardless of underling market volatility. This provides an extra level of protection for clients should volatility blow out unexpectedly.
Margin Close-out Levels Reduced
Margin-close out acts as a circuit breaker on a client’s account by closing trades if losses of open trades fall below a certain threshold.
Therefore, when the sum of unrealised profit or losses fall to less than half of the total margin deposit required for the open trades, margin close-out will occur.
For example, if a client has three open trades which required $1000 of margin to open and their total profit and loss falls below $500, then margin close-out will occur.