ASIC Prohibits CFDs “Margin Discounts”: How Shall Brokers Prepare?

In ASIC’s most recent Market Integrity Update issued in July 2024, it expressed concerns that some derivative issuers of contracts for difference (CFDs) may be offering “margin discounts” to retail clients with opposing long and short contracts in contravention of ASIC Corporations (Product Intervention Order – Contract for Difference) Instrument 2020/986 (“CFD PIO”).

ASIC warns CFD issuers that these “margin discounts” must cease immediately.

What Does the CFD PIO Say?

The CFD PIO came into force in October 2020 and is applicable to CFD issuers that provide CFDs to retail clients. According to the CFD PIO, a CFD issuer must not issue a CFD to a retail client except in accordance with the conditions set out in the CFD PIO.

The two conditions set out in the CFD PIO that prohibit providing “margin discount” for opposing positions to retail clients are:

• Section 7(2) of the CFD PIO which requires an initial margin to be provided and depending on the underlying asset for the CFD, the required initial margin is between 3.33% to 50% of the notional value of the CFD. Based on this condition, a CFD issuer is not permitted to net off the notional value of opposing CFD positions in a retail client’s CFD trading account when calculating the initial margin required;
• Sections 7(3) and (4) of the CFD PIO provide margin close out protection which the “aggregate close out protection amount” is calculated by reference to the aggregate initial margin required for opening CFDs in the retail client’s CFD trading account. Based on this condition, a CFD issuer is not permitted to net off the notional value of opposing CFD positions in a retail client’s CFD trading account when calculating the aggregate close out protection amount.

ASIC indicates in the Market Integrity Update that these “margin discount” practices may result in significant harm to retail clients as they may:

• encourage the building of excessive leveraged positions;
• lead to the retail client incurring increased overnight funding costs (swap costs);
• lead to the margin close out protection not being triggered when the retail client has incurred significant losses on open positions;
• lead to the retail client incurring sudden and significant required margin increases when one of their opposing positions is closed and the effect of margin discount or netting is removed.

Please note that contraventions of the CFD PIO can lead to civil and criminal penalties and ASIC is currently investigating ‘margin discount’ practices.

What Should Brokers Do?

We encourage all CFD issuers in Australia, in relation to their offering of CFDs to retail clients, to:

1. Check your disclosure documents and see if “margin discounts” are allowed under these disclosure documents.
2. Check if “margin discounts” are being provided to retail clients on opposing CFD positions in practice.
3. If yes, carefully consider whether a breach has arisen and whether a reportable situation is required to be notified to ASIC and take appropriate steps to do so.
4. Consider your obligations to remediate affected retail clients for any losses (and any other related fees and costs).

ASIC's warning to CFD issuers highlights the importance of complying with the CFD PIO regulations to protect retail clients from the risks associated with “margin discounts.” Failure to adhere to these rules can result in severe penalties, including civil and criminal actions. CFD issuers must promptly review their practices to ensure they are operating within the regulatory framework and safeguard their clients from potential harm.