ASIC, Australia’s financial regulator, has enforced its product intervention power, “strengthening” protections for Australian CFD traders. But will the leverage restrictions actually help protect Australian CFD traders or will they actually harm them?

We examine how ASIC’s leverage changes to CFD trading in Australia will impact retail clients.

The changes that came into effect on 29 March 2021 will, according to ASIC, bring “Australian practice into line with protections in force in comparable markets elsewhere“. Click here to see the full press release.

ASIC Leverage Restrictions – What Changes Have They Made? 

(1) CFD Leverage Restrictions

This is without doubt the most significant change being imposed. After all, Australian CFD traders rely on leverage – it’s one of the main benefits of trading CFDs.

The new rates of leverage are:

• 30:1 for major currency pairs
• 20:1 for minor currency pairs, gold or major indices
• 10:1 for commodities (i.e. oil) or minor indices
• 2:1 for cryptocurrencies
• 5:1 for shares and/or other assets

Given most Australian CFD brokers did offer leverage of at least 200:1, these changes are immense..

Example:

• Your CFD broker currently offers leverage of 200:1
• You wish to BUY 1 x German DAX (index) contracts
• Under current market conditions, using leverage of 200:1, you would need around AUD $65 in your account to have enough margin to open that trade
• With ASIC’s new (reduced) leverage on major indices of 20:1, you would need c., $650 on account!

(2) Margin Close-Out %’s

When a client’s equity in their CFD trading account falls below 50% of the total margin required for all open positions on their account, a CFD broker must auto close one or all CFD positions held by the client. This will be standardised across the board so every CFD broker is the same %.

(3) Negative Balance Protection

This change will ensure that clients do not end up owing brokers more money than they have on their account. In our opinion, this is an excellent change for CFD traders.

(4) Prohibit “Inducements” To Trade

Australian CFD brokers can no longer offer any form of incentives to trade. For example, no welcome bonuses, no monthly rebates, no “free” iPads if you trade a certain amount etc.

ASICs Leverage Restrictions – What Are Your Options?

1. Keep calm and carry on.

You can continue to trade with your Australian broker, but you will only get access to leverage of 30:1 (maximum).

2.  Become a Wholesale (Pro) Client

As ASICs changes only apply to retail investors, there is another option – becoming a Wholesale client. Pro or Wholesale clients are not affected by these changes and so you may be able to apply and be recognised as a wholesale investor. If you were successful in your Pro client application, you would continue to receive higher rates of leverage.

To qualify for the Wholesale categorisation, you need to meet one of the following conditions:

• Net assets of at least A $2.5M (i.e. home, savings, other property/ assets, superannuation/ pension)
• Gross income for each of the last two financial years of at least A $250k

To find out more, please click here.

3. Open an account with an offshore CFD broker

There are CFD brokers in other jurisdictions that can offer higher amounts of leverage. But please beware.. Many of these brokers are unregulated and based in jurisdictions hardly known as financial hubs (Vanuatu etc.)… NEVER trade with an unregulated broker, EVER.

If you are looking for an offshore CFD broker, please go with a more established broker (see table below). Also, remember our point above – your current CFD broker will be in touch with a plan.. This may include you moving to another of their regulated entities and/or re-classifying you as a wholesale client.

Our #1 Recommended “Offshore” (NZ) CFD Broker:

Launched in 2014, BlackBull Markets is today considered a top-tier CFD & FX broker, with a presence around the world. They offer ECN trading with no dealing desk, low spreads and lightening quick execution.

• Leverage: 500:1
• Regulation: FMA in NZ
• Opening amount: $0
• Spreads: Variable
• Trading platform: MT4 and MT5

Please note, as BlackBull Markets are regulated by the FMA in New Zealand, they DO NOT need to cut their leverage like all ASIC-regulated CFD brokers. Australian residents can sign up with BlackBull and continue to get leverage of up to 500:1!

Read BlackBull Markets Review

Why Have ASIC Restricted Leverage and Made Other Changes?

As mentioned earlier, ASIC have been watching the Australian CFD industry very closely for a number of years. In 2017, 2019 and 2020, ASIC reviewed the CFD space and found that an overwhelming number of retail clients lose money trading CFDs.

During the start of COVID-19, in a volatile period between Mar-Apr 2020, the clients of 13 Australian CFD brokers lost over $774 million.

During this period:

• 1.1 million CFD trades were closed due to margin close-outs
• more than 15,000 client accounts fell into negative balance owing more than $10.5 million

It is our opinion that ASIC had already made their mind up to re-shape the CFD industry here in Australia. And when COVID hit and they saw the horrific losses above, they had no option but to make changes.

These changes took place 29 March 2021.