This article discusses the state of the CFD trading in Australia, how regulation of the market is carried out and how this factor affects the market players in that industry.
Contracts-for-Difference instruments first hit the scene in Australia in March 2002, when CMC Markets and the IG Group made the entry into this market three months apart from each other. Several studies have shown that CFD trading in Australia is now the most popular mode of financial investments, trumping numbers obtained from the forex market.
This popularity peaked in 2007 when a mad rush of foreign CFD trading providers engaged the Australian marketplace.
A large chunk of Australia’s CFD market is controlled by CMC Markets and IG Markets. A very small percentage of trading is done on the ASX’s CFD exchange, with the market makers and white-label brokers making up the rest of the numbers.
The majority of CFD trading in Australia is carried out on the proprietary platforms of 4 major providers: CMC Markets, IG Markets, City Index and Macquarie Bank.
There are also several ‘white-label’ providers; companies which operate under logos of other companies. In this class will come providers such as Halifax Futures, Spectrum Live, ProTrader, Commonwealth Securities (CommSec), Marketech, VBM Capital, WealthWithin, GET Futures, Tolhurst Noall, GT Financial, Adest Trader, First Prudential and Capital Markets Group.
Much of CFD trading in Australia is based on index, currency and commodity trading, with a reducing proportion of trades being based on shares listed on the ASX. This can be attributed to some of the hits that the stock market has taken since the days of the global financial crisis.
So the question is: what is the status of CFD trading and regulation in Australia? A survey shows that nearly half of active traders use the Direct Market Access (DMA) model when trading CFDs. About 52% of traders use the Market Maker model, citing ease of use as the reason for usage. 1% of the CFD trading population in Australia uses the exchange-traded model, preferring to trade CFDs on the Australian Stock Exchange (ASX).
These models all have implications on the regulatory framework at play in the Australian CFD market. All companies offering CFD products are required to be registered under the appropriate category with the Australian Securities and Investment Commission (ASIC).
ASIC has what it terms “client money handling” rules, which guide the way the CFD brokers handle money belonging to its clients. These rules were released in July 2010. Under the terms of the client money handling rules, ASIC requires all CFD brokers in Australia to do the following:
– All money in client money accounts operated under margin rules must be put in a segregated or trust account, which protects these monies in case of closure or bankruptcy of the brokerage firm.
– All CFD brokerages (also known as AFS licensees) must ensure that only client money, interests on client money or interest on permitted investments using client money/the proceeds of the realization of permitted investments, must be paid into the client money accounts.
– AFS licensees are to clearly and prominently disclose in its Product Disclosure Statement (PDS), information on how they deal with client money and when, and on what basis, it makes withdrawals from client money; and the nature of the counterparty risk for client money used for derivatives.
– AFS licensees are also to inform their clients about the counterparty risks they face when they trade CFDs, especially for brokers who operate a market maker model.
– The CFD trades can only cover investments on deposit with an Australian ADI or eligible money market dealer as well as investment in a security issued or guaranteed by the Commonwealth or a state or territory within Australia.
– Trading on CFD contracts on foreign assets is not considered illegal, but exchanges are expected to put limitations on foreign assets tradable on their platforms. The policy is to promote increased depth of trading of Australian assets.
CFD trading in Australia has come a long way, and this has permitted a well regulated trading environment to evolve, based on lessons that have been learnt along the way. Traders have a choice of trading CFDs on broker platforms (market-maker and direct market access), as well as on the ASX exchange.
Whichever model of trade is chosen, traders must be careful to ensure that there are no contraventions by their brokers in the way the brokers handle their money. There are rules in place to safeguard their investments.