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CFDs in the fire-arm sights of the corporate regulator

PROMOTERS of the controversial and very much leveraged derivative product, contracts for difference, face tougher regulation.

This is unless they voluntarily introduce stricter measures to protect retail investors.

The Australian Securities & Investments Commission, that released its highly anticipated "health check" report on the CFD emporium yesterday, has warned that it will lobby the federal government to conduct regulatory reforms if the industry fails to lift its standards.

The threat comes after an extensive review by the watchdog found many investors were careless to the risks of CFDs, the bulk of which are traded to boot the counter and without oversight from any regulatory body.

It has in addition taken issue with TV commercials and investor seminars to market CFDs to mainstream audiences, which are considered largely unsuitable candidates for the product.

ASIC commissioner Greg Medcraft said the commission had been monitoring the growing CFD market for more time.

"Our health check study shows CFD issuers need to lifting their game in making sure investors understand how CFDs work and are mindful of the very significant risks when trading these complex financial products," he reported.

ASIC has proposed a range of recommendations, most of which ask a degree of self-regulation by the industry. They include unaccustomed disclosure benchmarks for over-the-counter CFD providers plus a entreat that all providers devise a policy on client suitability. ASIC has also flagged a crackdown on inappropriate advertising by the industry and intends to proclaim a guide to investing in CFDs.

The commission has also warned that it be pleased push for possible law reform in the event that its actions carry into effect not lift standards.

"We see this as a warning and we’re hoping the assiduousness takes heed," Mr Medcraft said.

The crackdown has come jointly growing concerns about the risks associated with CFDs, which are an agreement between two parties to exchange the difference between the access price and exit price of an asset. They give the investor the benefits of owning a dolt, without the need to invest in the physical share.

But core a highly leveraged product, the downside risks are substantial. For prototype, a $5000 investment leveraged at 95 per cent could expose some unsuccessful trader to a $100,000 liability.

The commission has made none secret of its disdain for CFDs, which are banned in the US and very much regulated in Britain, and having previously described them as "riskier than a flap on the horses or a night at the casino".

CFDs be favored with also been linked to numerous high-profile insider trading cases. The fresh multi-million-dollar collapse of Sonray Capital Markets, a CFD commercial specialist, has compounded ASIC’s concerns.

Customers of Sonray have reportedly claimed they were unaware of their funds being pooled with other clients’ funds, exposing them to other clients’ losses.

Following this, ASIC has released a lead on client money, which aims to promote better disclosure and control retail investors properly understand the handling of their money and associated calculator-party risks.

While the exact size of the CFD market in Australia is uninvestigated, it is estimated that about 35,000 participants hold more than $350 the great body of the people in the products.

The ASX also promotes its own exchange-traded CFDs, only these regulated products carry significantly lesser risk.

According to ASIC’s bruit, Contracts for Difference and Retail Investors, many retail investors did not strive after financial advice prior to investing in over-the-counter CFDs, frequently did not receive sufficient information to make an informed decision here and there whether to trade, were confused about how the product operated and did not appreciate the risks.

About 15 per cent of traders had between 50 and 100 through cent of their investment portfolios in CFDs, with some using their privacy savings as trading capital.

"These behaviours are all a produce for concern as the highly leveraged nature of the product way that small market movements could easily result in margin calls that traders may be unable to meet," the report says.

"Many deal out in small portions investors appear to be over-confident in their understanding of CFDs and their efficiency to successfully trade them."

ASIC believes that the complex edifice of CFDs means they are unlikely to meet the investment of necessity and objectives, or the risk profile, of many retail investors.

IG Markets and CMC Markets, that control about 70 per cent of the local market, have both welcomed the report.

While a spokesman for IG Markets said the assemblage was still assessing the report, CMC’s Australian managing director Barry Odes uttered a well-regulated industry was in everyone’s best interests.

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