The order’s prohibitions
ASIC made the order under subsection 1023D(3) of the Corporations Act 2001. Section 5 of the order sets out four prohibitions, in subsections (1) to (4), all applying from 29 March 2021. The first two read:
“A CFD issuer must not issue a CFD to a retail client except in accordance with the conditions specified in subsections 7(2) to (5).”
“A person who carries on a business of arranging for the issue of CFDs must not arrange for the issue of a CFD by a CFD issuer to a retail client except in accordance with the conditions specified in subsections 7(2) to (5).”
ASIC’s CFD product intervention order, as made on 23 October 2020The first duty sits with the issuer and the second with anyone in the business of arranging the issue of CFDs; both protect the retail client. Subsections (3) and (4) are in the order itself. Who counts as a retail client is the subject of retail or wholesale: why it matters.
The minimum margins
One condition is written into the contract itself. In the order’s words, “The terms of the CFD must require the retail client to provide an initial margin of at least” a percentage of the CFD’s notional value at the time of issue, set by what the CFD tracks:
| Underlying | Minimum initial margin | Works out at about |
|---|---|---|
| An exchange rate for a major currency pair | 3.33% | 30:1 |
| A major stock market index, a minor currency pair, or gold | 5% | 20:1 |
| A minor stock market index, or a commodity other than gold | 10% | 10:1 |
| A cryptoasset | 50% | 2:1 |
| An underlying not referred to in the rows above | 20% | 5:1 |
The last column is plain arithmetic, the position divided by the minimum margin; the order states percentages, and ASIC’s summary of the result is the range from 30:1 to 2:1.
The order names its ten major stock market indices: 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. Any other stock market index is a minor one. The seven currencies that make up the major pairs are listed in what forex and CFDs are.
What the numbers mean in money
An illustration, from the order’s percentages
At the 3.33% minimum for a major currency pair, $1,000 of margin can open a position worth about $30,000. At the 50% minimum for a cryptoasset, the same $1,000 opens a position of $2,000.
Moneysmart’s own example uses 5%, the order’s minimum for a major index, a minor currency pair or gold: $5,000 put up for a $100,000 position, which could all be lost if the underlying moves 5% the wrong way. Before the order, ASIC said, “a retail investor’s CFD exposure could be as much as 500 times their original outlay.”
Why ASIC made the order
On 22 August 2019 ASIC released Consultation Paper 322, seeking feedback on using its product intervention power against significant detriment to retail clients from over-the-counter binary options and CFDs. It drew more than 400 responses from consumers, consumer groups, product issuers, industry bodies and others. ASIC made the order on 23 October 2020, and it came into effect on 29 March 2021 after ASIC’s reviews of 2017, 2019 and 2020 found that most retail clients trading CFDs lose money.
ASIC said the order reduces the CFD leverage open to retail clients, and targets product features and sales practices that magnify their losses, such as inducements to become a client or to trade.
What ASIC saw in the first six months
When it extended the order in 2022, ASIC said the order had been effective in reducing the risk of significant detriment to retail clients from CFDs. In the order’s first six months, ASIC observed, among other things:
- aggregate net losses on retail client accounts down 91%, from an average of $372 million a quarter to $33 million;
- margin close-outs on retail client accounts down 87% a quarter on average;
- negative balance occurrences for retail clients down 88% a quarter on average.
How long the order lasts
- As made, 2020 The instrument commenced on the later of 23 November 2020 and the day after its registration, and its prohibitions applied from 29 March 2021. It carried a note that, subject to any Court order affecting it, it would remain in force for 18 months from the day it commenced, under subsection 1023G(2) of the Act.
- 29 March 2021 The order came into effect. ASIC said then that after 18 months it could be extended or made permanent.
- 2022 ASIC extended the order for a further five years, to 23 May 2027, saying this kept Australia’s CFD protections in line with those in comparable markets elsewhere. The extending instrument, made under subsection 1023H(1), keeps the order in force until the end of 23 May 2027, unless it is revoked earlier.
- Now That end date is about seven months after this page was checked. Check ASIC’s media releases for any further extension or change before relying on these figures.
If the order is broken
In its release of 29 March 2021, as the order took effect, ASIC put the maximum penalty for contravening a product intervention order at five years’ imprisonment for individuals and, for corporations, pecuniary penalties of up to $555 million, figures as at that date. For a corporation’s contravention from 1 July 2026, section 1317G of the Corporations Act caps the turnover-based penalty at 2.5 million penalty units, which is $910 million at the Commonwealth penalty unit of $364. If a court finds that a person has contravened the order, a retail client may recover the loss or damage the contravention caused.
“We will closely monitor compliance with the product intervention order and won’t hesitate to take appropriate action to enforce the order.”
ASIC Commissioner Cathie Armour, ASIC media release 21-060MRThe leverage limits sit beside two protections on the account itself, set out in the protections on a retail CFD account. Back to the margin ladder on the home page.