7 February 2017

Part I: OTC derivatives (CFDs, margin FX) clampdown? Australia proposes new product intervention powers, following global trend

Holley Nethercote


Holley Nethercote Lawyers offers preventative law services with deep regulatory expertise. Holley Nethercote Compliance provides non-legal services through HN Training, HN Hub, HN Licensing, HN Documents, and HN Policy to keep clients compliant.
This article focuses on a Proposals Paper entitled Design and Distribution Obligations and Product Intervention Power.
Australia Finance and Banking
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What do the US, Quebec, Turkey, Belgium, France, UK, Hong Kong, Japan, Cyprus, and now Australia, have in common? They all have existing or proposed product intervention-style powers to restrict the offering of various types of OTC derivatives to the public.

What do the following people have in common: The owner of a small, failing grocery store, a self-confessed shopaholic, and a new mum struggling to pay bills? Well, according to a CFDs and margin-forex business testimonial-style advert, they all solved their problems by trading their way out of them.

Government regulatory powers, to protect consumers, easily pick up advertisements like the real-life example above. However, these new product intervention powers have a far wider reach, which we explore below.


This article focuses on a Proposals Paper issued by the Australian Government on 13 December 2016, titled Design and Distribution Obligations and Product Intervention Power. This is the second proposal relevant to the OTC sector released in as many months – in November, the Australian Government released a proposal to charge OTC Derivative providers an annual levy of $61,400.

The December paper was followed closely by an International Organization of Securities Commissions (IOSCO) Report, titled Report on the IOSCO Survey on Retail OTC Leveraged Products, which acts as a summary of what's going on globally in this space. It was released on 22 December. In all, the two papers and the report provide you with some not-so-light New Year reading.

Also, on 6 December 2016, the UK regulator told its 104 authorised CFDs providers (including rolling spot forex contracts providers), that it was imposing stricter rules. To quote the announcement directly:

"The new measures include:

Two days later, on 8 December, we coincidentally ran our quarterly CFDs Compliance Forum in Sydney (we allow dial-ins), and the number one question was: is Australia going to follow suit? At that time, all we had to go on was the Financial System Inquiry proposals to introduce a product intervention power, which came out almost exactly 2 years earlier. A week after the forum, we have a detailed 62-page proposals paper. (For the answer to the leverage question, go straight to numbered paragraph 4, below.)


In the old days, Governments and their financial markets regulators used to subscribe to the efficient market hypothesis. To paraphrase, if you require product providers to disclose their product information, consumers will make the right, informed choice about whether to purchase the product.

Since then, behavioural psychologists have finally made the point that the factors that influence our decisions are far more complex. We trade forex because: our friend does, and she told us how much money she made over the weekend trading AUD/USD. We also trade forex because we trust the issuer's brand. Some people dabble in binaries because they like to play the odds and keep things simple. But, it turns out that consumers don't read the 50+ page product disclosure statements on issuer websites. Fancy that!

So, governments around the world have restricted certain products from particular markets in various ways. We have curated legal advice in around 10 non-Australian jurisdictions about offering OTC derivatives, and of course, every country is different. However, many of them are following a trend – move over disclosure, product intervention is the new black.

  • Introducing standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts by all providers to better illustrate the risks and historical performance of these products.
  • Setting lower leverage limits for inexperienced retail clients who do not have 12 months or more experience of active trading in CFDs, with a maximum of 25:1.
  • Capping leverage at a maximum level of 50:1 for all retail clients, and introducing lower leverage caps across different assets according to their risks. Some levels of leverage currently offered to retail customers exceed 200:1.
  • Preventing providers from using any form of trading or account opening bonuses or benefits to promote CFD products."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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