Regulatory Winds Reshaping Australian Retail Trading

In recent years, the retail trading industry has drawn the attention of regulators across the world. The resulting changes signal a transformational shift in how the markets will function and have major implications for retail trading platforms that don’t put client interests at their core.

In the EU, the European Securities and Markets Authority (ESMA) recently announced a new policy statement for retail clients that addresses three key areas. Firstly, binary options will be banned. Secondly, leverage caps will be implemented. And thirdly, brokers will be required to introduce margin closeouts that provide negative balance protection.

While the ESMA statement was written for the EU, it has been closely monitored by regulators around the world, including in Australia. The Australian Securities and Investments Commission (ASIC) is carefully considering this statement as its looks to improve practices in the retail trading, including in OTC derivatives, FX and binary options.

OTC derivatives

For instance, a recent ASIC paper looked at ways to improve practices in Australia’s AUD 11 trillion (USD 7.95 trillion)  retail OTC derivatives sector, identifying a number of risks associated with the products on offer in the market. With an overwhelming 97 percent of activity in this market conducted by retail traders, ASIC is understandably concerned about issues such as misleading marketing material, unclear pricing methodologies, inappropriate referral arrangements, and inadequate risk management practices and monitoring of counterparties.

According to the report, approximately one third of brokers are reliant on a single third party – often located outside Australia – for pricing and hedging services, which could pose a greater credit risk to retail investors. ASIC has suggested that any new stipulations are likely to follow ESMA’s lead and will hopefully allay some of these concerns.

This is a commendable approach, and should ASIC implement similar changes to ESMA, it will be positive for the industry as a whole. Such a move will send a clear directive that brokers must create a fair and transparent trading arena and take a customer-centric approach to trading, which will bode well for the long-term sustainability of the retail trading industry.

Any new rules will be complementary to recent investor protection legislation that has already come into effect. Since April 2018, brokers were no longer able to use client money to hedge their positions with counterparties. This fixes an anomaly where for many years, Australia was also one of the few markets in the world that allowed brokers to hedge client positions with customer money.

The new client money rules have already impacted the FX and CFD landscape significantly. This has been very positive move for traders, improving transparency and creating greater protection by ensuring that their funds are segregated from the broker’s own capital. The new guidance also imposed new record-keeping, reconciliation and reporting requirements.

Last month, ASIC cancelled the licensed of Direct FX Trading for failing to provide daily and monthly reconciliations of client money the firm held, among other compliance failures.


ASIC is also looking to stay one step ahead of the market by keeping a close watch on cryptocurrencies, recognising that pricing and hedging risk from underlying cryptocurrency assets can also be difficult.

“Issuers that offer cryptocurrency CFDs need to make sure their clients understand the pricing and risks associated with these products,” ASIC said in a recent statement. “They also need to make sure they have adequate risk management frameworks and capital to deal with these risks.”

There’s certainly been a significant increase in demand for cryptocurrencies in the last year, and Australia has been no exception. However, when the crypto boom first started, some brokers rushed to roll out offerings in this nascent asset class, resulting in an uncertain landscape. Others have taken a more cautious approach, preferring instead to wait for better investor protection mechanisms and greater regulatory clarity.

The evolving regulatory environment is no doubt contributing to the caution in the crypto market. In a world where the needs of the customer come first, it is more important to get the offering right for retail traders than rush out a product, even if the demand is there.

As we look to the future role of crypto in the OTC derivatives market, there needs to be the same robust level of service, dedication to transparency, and commitment to tight spreads and liquidity that are offered with traditional currencies. If cryptocurrencies are to become mainstream, we must ensure the same rigorous protections for traders.

Regardless of the pace at which regulations in Australia keep up with the rest of the world, the industry as a whole must act with ‘care for customers’ as the guiding principle.

Anthony Griffin is managing director of OANDA Australia and an ASIC Registered Representative in Futures and Options, Foreign Exchange and Securities. He has more than 30 years’ experience in the financial industry and is an alumnus of the Stanford University Graduate School of Business.

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