Forex and CFD rules, a guide by DottoIn plain words

Margin forex and CFDs in Australia

Forex brokers: the rules a trader should know

Look here for a league table of forex brokers and you will find the rule book instead: the conditions ASIC’s product intervention order puts on a business issuing contracts for difference to a retail client, what ASIC’s regulatory guide asks those businesses to disclose, and the checks Moneysmart describes before an account is opened. A guide published by Dotto from the official sources listed at the foot of each page.

General information, not financial advice. The official place to check is Moneysmart’s page on forex trading, run by ASIC.

The minimum margin, by what the contract tracks

Forex trading, also called margin FX, is an attempt to profit by predicting how exchange rates move. Moneysmart says ASIC generally regulates margin FX as a type of contract for difference, or CFD: a contract that lets a trader speculate on exchange rates without owning the currency.

Since 29 March 2021, ASIC’s product intervention order has set a floor under the money a retail client puts up. The terms of a CFD issued to a retail client must require an initial margin of at least a set share of the CFD’s notional value at the time of issue, and the share depends on the underlying, the thing the CFD tracks.

  1. An exchange rate for a major currency pair3.33%about 30:1
  2. A major stock market index, a minor currency pair, or gold5%about 20:1
  3. A minor stock market index, or a commodity other than gold10%about 10:1
  4. Any underlying not in the other rows20%about 5:1
  5. A cryptoasset50%about 2:1
Minimum initial margin for a retail client, as a share of the CFD’s notional value at the time of issue, from ASIC’s order. ASIC describes the result as leverage limits ranging from 30:1 to 2:1. The ratio under each figure is plain arithmetic, the position divided by the minimum margin; the order itself states percentages.

A major currency pair is any two of the Australian dollar, British pound, Canadian dollar, euro, Japanese yen, Swiss franc and US dollar; every other pair is a minor one. Before the order, ASIC said, a retail investor’s CFD exposure could reach 500 times what they first put in. The guide to the leverage limits sets out the whole table, the dates and what ASIC saw once the order took hold.

Three protections on a retail account

Moneysmart lists what ASIC’s restrictions require of CFD issuers selling to retail investors in Australia. Among them, CFD issuers must:

  • apply margin close-out protection, which closes one or more positions before losses pass prescribed levels;
  • provide negative balance protection, so a retail client never loses more than the money in their CFD trading account.

And CFD issuers must not offer incentives to trade, such as trading credits, rebates or ‘free’ gifts. The guide to the protections on the account adds what ASIC’s Regulatory Guide 227 asks a provider to disclose about client money, opening deposits and its own finances.

Who the rules are written for

The order’s conditions apply when a CFD is issued to a retail client. Moneysmart warns that a trader classed as a wholesale client loses many of the consumer protections a retail client has, and may not have negative balance or margin close-out protection, so they can end up owing the CFD provider money. Retail or wholesale: why it matters explains the difference and the binary options ban that turns on it.

Checking a provider

Among the checks Moneysmart describes is whether a forex provider holds an Australian Financial Services (AFS) licence, which ASIC’s Professional Registers Search shows. Trading through an overseas provider without one may mean Australian consumer protections do not apply, including access to the Australian Financial Complaints Authority (AFCA). The guide to checking a broker and spotting scams walks through ASIC’s registers and the warning signs Scamwatch and Moneysmart describe.

Dates in the rules

  • 31 March 2012: from this date ASIC expected CFD issuers to disclose against the benchmarks in Regulatory Guide 227.
  • 23 October 2020: ASIC made the product intervention order for CFDs issued to retail clients.
  • 29 March 2021: the order came into effect.
  • 23 May 2027: the order stays in force until the end of this day unless it is revoked earlier, after ASIC extended it for a further five years. That date is close: check ASIC’s website for any extension or change before relying on it.

For what a CFD is in the first place, and what leverage does to a small deposit, start with what forex and CFDs are.