ASIC Implements New Regulations for Wholesale Clients

As market participants wait for the Australian Securities and Investments Commission (ASIC) to implement its proposed Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term restrictions for contracts for differences (CFDs), the regulator has implemented new regulations regarding wholesale clients.

In particular, the regulator has excluded the ‘price and value test’ for issuers of CFDs. The price and value test is one of the tests used by CFD issuers when classifying customers as wholesale clients.

In Australia, wholesale clients are similar to professional investors in Europe and may have access to a wider range of investments, but they don’t have the same level of consumer protections that apply to retail clients.

Specifically, the price and value test provided by s 761G(7)(a) of the Corporations Act 2001 (Cth) allows licensees to classify clients as wholesale where the price or value of a financial product provided to a person exceeds AU$500,000. The amended regulations do not affect other wholesale investor tests.

According to a statement prepared by Sophie Gerber, a Director at Sophie Grace and TRAction Fintech: “The rationale behind the amendment appears to be that the notional value of AU$500,000 under a CFD could be achieved with a modest initial margin."

“Clients who are classified as wholesale are excluded from certain regulations under the Corporations Act including issuing of disclosure documents including Product Disclosure Statement and Financial Services Guide; ability to lodge complaints with AFCA; ensuring staff dealing with clients hold appropriate RG 146 courses and the treatment of Client Money Client Money Client money refers to the money or margin – which may be any currency in the form of cash, check, draft, or electronic transfer – that a firm receives or holds for a client. Money held by a firm in the form of a stakeholder, which is are not payable on demand or immediately due, also refers to client money. The definition of client money does not apply to money held by businesses that operate in its own name on behalf of a client. Although the client does have to be in agreement before this arr Client money refers to the money or margin – which may be any currency in the form of cash, check, draft, or electronic transfer – that a firm receives or holds for a client. Money held by a firm in the form of a stakeholder, which is are not payable on demand or immediately due, also refers to client money. The definition of client money does not apply to money held by businesses that operate in its own name on behalf of a client. Although the client does have to be in agreement before this arr Read this Term.”

What should CFD issuers do next?

All ASIC licensees that issue CFDs should review their wholesale clients and determine their classification test. If they were classified as a wholesale investor using the price and value test, then the licensee should check whether the client may meet any of the other requirements, which can be found here.

“Where it is no longer appropriate that the client be classified as a wholesale investor, the licensee should inform the client of the reclassification including issuing disclosure documentation and advising the client of his or her new customer protections,” Gerber said.

“A reconciliation of client money should also immediately occur to ensure that client money which was previously classified as wholesale adheres to the rules for the treatment of retail client money.”