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New ASIC rules for CFD trading

András Iván

2021-03-25

Reacting to a volatile 2020, when many retail traders lost money because of too-high leverage at some CFD brokers, the Australian Securities and Investment Commission (ASIC) has passed a product intervention order that will change some rules relating to CFD trading by retail customers.

The instrument will come into effect from 29 March 2021. Among others, it will impose leverage restrictions and negative balance protection, whilst standardizing margin close-out arrangements and prohibiting inducements in the sale of CFDs.

This follows similar measures introduced earlier in the UK and the European Union. The order will remain in force for 18 months, after which it may be extended or made permanent.

You might be affected if you're trading CFDs at an Australian broker or any other broker that has an ASIC license and onboarded you through their Aussie license. Popular brokers like Pepperstone, Saxo Bank, IG, markets.com, FXCM, XTB, City Index, CMC Markets and many others will be affected.

 

Overall, we at BrokerChooser think these changes are good for the industry and advantageous for the average retail customer. However, if you've used very high leverage in the past, you may find yourself a bit limited by this intervention.

 

Negative balance protection

Negative balance protection will be provided to limit the losses you can incur when you trade CFDs. This means that you can't lose more than your account balance, i.e. you won't owe money to the broker regardless of any special/black swan events.

 

Changes to leverage caps

A key change is leverage restrictions, which will affect the amount of margin retail clients are required to deposit to open any new CFD or FX positions from 29 March onwards. Specifically:

  • 30:1 leverage on major currency pairs (any two of the Australian dollar, British pound, Canadian dollar, Euro, Japanese yen, Swiss franc and US dollar)
  • 20:1 leverage on major indices, gold and minor currency pairs (major stock market indices are the CAC 40, DAX, Dow Jones Industrial Average, EURO STOXX 50 Index, FTSE 100, NASDAQ-100 Index, NASDAQ Composite Index, Nikkei Stock Average, S&P 500 and S&P/ASX 200)
  • 10:1 leverage on commodities (excluding gold) and minor indices
  • 2:1 leverage on cryptocurrency assets
  • 5:1 leverage on shares or other underlying assets

 

Compulsory margin close outs

From 29 March, if the funds you hold in your account fall to less than 50% of the margin required for all of your open trades, then your brokers will be required to close out positions. 

Any existing positions opened prior to 29 March will also be subject to the new 50% margin close-out requirement. This means that you may need to deposit more funds into your account to cover the additional margin required and to avoid your positions being closed out. It's your responsibility to monitor your positions.

 

Pepperstone uses the following example to demonstrate this change:

You're trading AUDUSD and the margin currency is AUD. You have an account with a balance of $1,000 and you enter a trade of 1 standard FX lot ($100,000) at a leverage of 500:1 (before the ASIC changes take effect). The initial margin requirement is 100,000/500 (leverage) = $200. This is the amount you need to open the trade.

Currently, once the trade is opened, you are required to maintain a minimum of 20% of the value of the initial margin in your account, otherwise you'll be closed out, 20% of $200 = $40. If your account balance falls to $40 or less, the trade will be closed out automatically.

After ASIC's changes take effect, even if you opened the trade before 29 March, your equity will need to be a minimum of 50% of the initial margin, 50% of $200 = $100. This is a $60 increase from before the rules came into effect.

Let’s say the market unfortunately moves against you and you incur a loss of $910, meaning you have $90 of equity left in your account ($1,000 - $910) and your Equity/Margin ratio is 45%: equity ($90) ÷ initial margin ($200) = 45%.

Under the current rules, your trade wouldn't be closed. However, under the new rules, your equity has dropped below the 50% requirement and your trade will be automatically closed out.

To avoid the trade closing out, you'll need to add additional margin to your account before the 50% close-out ratio is reached.

 

If you experience any issues while these changes are taking place, we'd really appreciate it if you left a comment under the respective reviews or emailed us directly at [email protected].

 

All the best,

BrokerChooser

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