Local contracts-for-difference (CFD) heavyweight IGMarkets Australia Ltd says the corporate watchdog’s concern with investors’ understanding of the high-risk trading products is misplaced.
Chief executive Tamas Szabo welcomes steps by the Australian Securities and Investments Commission (ASIC) toward tighter industry regulation, but says ample disclosure of risks is already being made. “All CFD providers highlight the risks of CFDs on both advertising when the account is open and on our website,” he said. “We ourselves vet all our clients that open accounts.” Mr Szabo was responding to concerns voiced by ASIC’s acting chairperson Belinda Gibson last Wednesday that investors do not properly understand the risks of trading in CFDs.
IG Markets Responds To ASIC Concerns
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ASIC is preparing to take charge of market supervision from the ASX within a few months, bolstering the corporate regulator’s power when it comes to scrutinising trading and monitoring stockbrokers. The ASIC deputy chairman, Belinda Gibson, said the regulator was planning to issue a discussion paper within two months warning about the high-risk instruments.
The $350 million CFD market grew by almost 25 per cent last year, but many investors might not understand the risks they are taking, Ms Gibson said, after speaking at a Stockbrokers Association of Australia Conference yesterday. CFDs allow investors to bet on movements in the prices of assets such as shares, currencies or commodities, and require only a small amount of up-front capital.
They were developed for sophisticated players, but have become popular with retail investors. ”We do have a concern whether a lot of people in the CFD market do understand this is a leveraged play into equities and they really understand counterparty risk with CFD providers,” Ms Gibson said.
Separately, ASIC revealed in taking charge of supervision it will be able to contact clients of stockbrokers directly if it believes suspect trading has taken place. Under the present rules, the ASX is limited only to investigating brokers and then refers the matter to the corporate regulator. The new arrangement will allow ASIC to move quicker to question investors if it suspects matters ranging from insider trading to front running of shares have occurred.
ASIC Keeping An Eye On CFD Growth – SMH
ASIC Keeping An Eye On CFD Growth – The Age
ASIC Keeping An Eye On CFD Growth – Australian
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The market for contracts for difference, or CFDs – grew by almost 25 per cent last year, but many investors may not understand the risks they are taking, according to the Australian Securities and Investments Commission. CFDs allow investors to bet on movements in the prices of assets such as shares, currencies or commodities and require only a small amount of up-front capital. An ASIC commissioner, Greg Medcraft, said the unlisted or ”over the counter” market for CFDs was of particular concern because of its low transparency, and this sector was now worth $350 million.
Mr Medcraft said some of the 35,000 investors in the market might falsely believe they own the underlying security, but the products were only a bet on price movements. In some instances, potential losses from CFDs were unlimited, he told a parliamentary committee.
”It’s a market that’s growing rapidly,” he said in Sydney. ”I think it’s very clearly a market to watch. I don’t think we’ve seen any horror stories emanating from that market, but I think we need to be careful.”
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Big brother is coming to a stock market near you. ASIC is considering introducing identification numbers for stock market traders. The so-called unique client identifiers would only be available for the regulator to see and would help in the detection of insider trading and market manipulation. ASIC head of corporate affairs Matthew Abbott said the commission was in the “very early stages” of contemplating the benefits of introducing them.
“This is an international issue, which is definitely on the radar of world regulators, and in Australia the markets are contemplating it, as are we,” he said. ASIC commissioner Belinda Gibson told the Parliamentary Joint Committee on Corporations and Financial Services yesterday that the best solution would be to introduce global client identifiers, a concept other jurisdictions were open to.
A review of algorithmic trading by the Australian Securities Exchange last year found that to detect misconduct, the client identifiers would have to be the same regardless of which broker or trading platform a trader used to execute their orders.
“It was considered that this information would provide the supervisor with a powerful new tool to detect insider trading, manipulation and front-running, irrespective of the method of execution, the broker or the trading platform,” the ASX report said.
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