ASIC Changes Wholesale Trading Regulations for CFDs

The Australian Securities and Investments Commission (ASIC) has been tightening up local regulations for the trading industry.

The watchdog has already decided to implement leverage restrictions for contracts for differences (CFDs) but that is still far off. The new set of rules released by the ASIC targets wholesale traders but also has an impact on CFDs.

The main change in the rules is that the price and value test can’t be used by issuers of CFDs going forward.

This test is the main way in which CFD issuers in Australia determine which clients can be considered as wholesale clients. The problem is that although wholesale traders can access more products, they also have less consumer protection since they are assumed to be richer than the ordinary customer and can absorb the risks.

Under Australian law, CFD issuers would normally be able to classify any buyer who can trade with A$500,000 as a wholesale trader. The problem is that with CFDs, even the lowest investor can reach this value thanks to how the CFDs work. They only need initial investment and through leverage can hit this amount.

With the customer now considered a wholesaler, CFD issuers would now be able to skip certain regulations like issuing disclosure documents that can reveal more about the trade. Investors also would not be able to lodge complaints or have a good chance of getting their money back in case of a default.

Next Move for Issuers

With the new regulations, CFD issuers are going to have to completely review their client list. They need to check all wholesale clients and see if they meet all of the other requirements outlined by the ASIC. The full list of new requirements is available at the ASIC site.

Some of the tests that are still valid include the large business test, which sees whether the investor has 20 or more employees, or the asset test, which checks whether they have $2.5 million in total assets.

If an investor classified as a wholesaler does not pass any of the other requirements, the issuer needs to notify them that they are not wholesale traders anymore. They should also be issued the necessary disclosure documentation along with info on the customer protections that they are entitled to. Additionally, current funds with the CFD issuer should be checked out and amended so that they follow the rules for retail trading.