The Australian FX and CFD market over the past two years has gone from strength to strength. Australian flow now represents 17% of the total transactional volume worldwide (which we estimate to be $122 trillion). This assertion is supported by data published by ASIC, where we now know that of the 60 licensed firms offering margin FX and CFDs in Australia, there are 1 million clients, $22 trillion of gross annual turnover (a 100% annual increase) and a staggering 675 million annual transactions.
Many analysts and pundits have put this exponential growth in the Australian CFD market down to regulatory arbitrage. In the face of significant regulatory change, including the implementation of ASIC’s product intervention powers, changes in industry custom for onboarding overseas clients following ASIC’s infamous media release, and the implementation of product design and distribution obligations – will the Australian market still rule supreme?
Regulatory Changes on the Horizon
A suite of regulatory changes has swept across Australia over the 12 months, with the implementation of some of these expected to occur in the next six months.
These include the Product Intervention powers, where ASIC has proposed eight new regulatory conditions. It is uncertain when these conditions will be released as a final ASIC Regulatory Instrument, but it is possible that it will be released any day now. The eight proposed conditions are:
- a mandated margin close-out protection of 50%;
- negative balance protection;
- prohibition on inducements such as gifts, rebates, trading credits or rewards;
- a risk warning disclosing the percentage of retail client trading losses over a 12 month period specific to the broker;
- real-time disclosure of overnight funding costs to be displayed on the broker’s Trading Platform as both an annualized rate of interest and as an estimated cost in the CFD’s currency;
- real-time disclosure of total position size;
- best execution requirements; and
- most controversially, leverage restrictions.
Outside of the product intervention powers, the Australian market was shaken by ASIC’s media release on 11 April 2018. The release, which put Australian brokers on notice, warned that by onboarding some clients from outside of Australia in
Sophie Gerber, co-CEO at TRAction Fintech and Director at Sophie Grace
circumstances where it would be illegal to do so, the companies may be breaching their financial services license.
As 83% of the Australian brokers’ volume was generated outside of Australia, the release posed a significant existential crisis. However, market practice has developed where brokers seek a legal opinion about the legality of onboarding clients abroad where they hold a noteworthy section of their client base from that jurisdiction. As a result, this release has not greatly impacted the local market as much as was previously thought. In recent informal polling performed on a sample of OTC derivative issuers, only 14% said that ASIC has followed up on this issue. However, ASIC maintains that the OTC derivatives sector will continue to be a focus in 2020.
Another obligation that is due to cause considerable consequences to the Australian FX and CFD industry is the design and distribution regime, which will apply from 5 April 2021. Final ASIC guidance has yet to be released on how these obligations should be implemented, but there is an expectation that ASIC will continue its firm approach.
Strength of the Australian Market
The good news – Australia will still have a large presence within the FX and CFD industry. The global perception rightly sees ASIC as having great consumer protections such as capital requirements and segregation of funds. AFCA allows a cheap and easy method for clients to resolve disputes with brokers. The country has a strong banking system. Local brands remain strong, including IC Markets, FP Markets, and Pepperstone. These firms have created talent within the industry, which is indelible on the global market. Staff from these local firms will move across the globe, transferring their know-how or move locally to Australian branches of firms founded abroad. With ASIC’s reluctance to issue more licenses for CFD trading, it is regrettable that more firms do not enter the market founded by the talented Australian workforce.
New regulatory change means that technology firms will come into the market to assist. For example, TRAction Fintech has recently developed a best execution tool to help brokers provide third-party verification and support for ASIC’s proposed changes. Inevitably, people from the Australian industry will move into the broker technology space (many of these technologies are known in the wider market as regtech and fintech), further enhancing the ecosystem of technology and professional services that exists around the FX and CFD industry.
Australia’s Place in the Global FX World
With the rapid geopolitical change over the last 12 months, Australia remains a strong contender for a leading FX center. Hong Kong, previously the financial hub of Asia, has experienced such great turmoil that its place in the world is unsteady. London, the eternal epicenter of FX and finance, is teetering in the balance due to Brexit . With the jewel of London losing its luster, it is possible another European capital such as Frankfurt could capitalize and become the new FX center of the world. Hurdles such as the vast infrastructure and know-how domiciled in London will make such a move slow and difficult. In Asia, Singapore has, over the years, become more and more dominant and will be perfectly placed to pick up volumes lost from Hong Kong.
Australia has all the reasons to firm its reputation as an FX Global Hub. The Australian government even stated in 2008 that it wishes to be a regional financial services sector. However, ASIC’s recent regulatory approach stands in stark contrast to this intention, and there is a feeling locally that overregulation could stymie this ambition.
Australian Market Conclusion
Regulatory changes will be challenging but will create new opportunities for firms. The outlook for the Australian market is not as bleak as some would suggest, and the Australian market will remain a large player in the context of the global market.
Sophie Gerber is the co-CEO of TRAction Fintech, a regulatory technology firm providing compliance solutions for brokers, including Best Execution and Derivative Trade Reporting and principal of legal firm, Sophie Grace which provides legal and compliance advice to financial service firms including FX and CFD brokers.
