Australia boasts an impressively large retail Forex market. The amount of traders who entered at least one trade in 2021 was determined to be over 100 000. What’s more, the market is home to some of the biggest brokers out there, industry leaders like Pepperstone started up there. extension of ASIC
On the other hand, prior to 2020, the Australian market was not as strictly regulated as its EU counterparts. These brokers got as big because in part because they were allowed to offer as high of a leverage as they deemed fit, which is attractive to retail clients. In 2021, this all changed with the regulatory body in the country, the Australian Securities and Investments Commission (ASIC) significantly stepping up its regulation and introducing a temporary product intervention that was supposed to last till 2022. The ASIC has reported this intervention has proven to be quite effective and recently vowed to extend it to 2027.
So what exactly were these measures, how did they impact the Australian forex markets and the brokers on it?
The ASIC product intervention of 2021- extension of ASIC
On 29.03.2021 the new rules that forex brokers in Australia had to comply with came into effect. These rules were quite extensive and included a severe cut in the leverage that was available to the retail trader. Previously, there had been no restriction of leverage, and brokers in Australia often had amounts like 1:100, 1:500 and so on available to their clients. After the ASIC stepped in, however, the new allowed leverage was set to 1:30 for assets like FX majors and less for more volatile ones – most notably, clients that seek to trade crypto CFDs are now only able to do so on a leverage of 1:2.
There are more measures brokers are required to comply with that were not previously required of them, of course. For example, they are now required to provide their clients with a Negative Balance protection. In the case of a margin call, this measure means that no retail client can lose more money than what they have invested in total.
These measures are not unique to Australia – as mentioned, other major jurisdictions like the EU, UK and the States also have similar restrictions in place. The reasoning for their introduction by the ASIC was the same as the reasoning of the other regulators – unmitigated, CFDs presented retail clients with a high level of danger. The ASIC notes that during a volatile period in 2020, the retail clients of 13 brokers it was overseeing made losses totaling over $774 million. But did the restrictions achieve their goal?
The positive impact of the restrictions – extension of ASIC
The ASIC has recently come out with a report detailing what happened on the markets and with the money of the retail trader during 2021 and 2022. These measures can only be described as a massive success. Retail clients lost an average of $33 million per quarter – compared to an average loss of $372 million per quarter, this is a 91% reduction.
What’s more, these changes led to a positive impact on clients who had to make use of the negative balance protection we mentioned – the instances in which it triggered were 88% less than would have been triggered before the introduction of the policy. Overall, there has been a reduction of 51% of accounts being in the red at the end of a quarter, and a 87% reduction in margin calls being reached at all.
As you can see, the stricter regulation the ASIC has introduced has proven to have achieved its goal. This was the reason behind the ASIC deciding to extend it with five years from the initial 18 months the new rules were supposed to be in effect. The new end date of for the regulatory intervention is 2027, and it seems the Australian markets are not likely to go back to their state before the regulation. However, have the measures that have proven so beneficial for the retail client hurt the bottom lines of brokers that have had to comply with them?
How Australian Forex brokers adapted to the new ASIC rules – extension of ASIC
Before the new tighter regulation was introduced, Australian brokers expected a similar outcome to the one on the EU markets when leverage was restricted there in 2018. When that happened, EU brokers reported their daily trading volume had gone down. Some reported a reduction of up to 30%. When the regulatory move happened, a lot of EU brokers set up offshore subsidiaries so they could continue offering high leverage trading. At the same time, brokers in Australia considered the introduction of leverage restrictions to be an inevitability, and considered a leverage of 1:30 to be the new worldwide standard. They therefore denied they would resort to such activities.
A year later, we can see if these predictions played out correctly. Firstly, did the Australian brokers suffer a shrinkage in trading volume due to the restrictions towards their retail clients? There is no conclusive data to consider a large reduction to have happened. Some brokers report a reduction in trading volume for FX assets, but the impact on other asset classes like commodities and stocks is not as high. Brokers did not offer as high of a leverage on them and the relative difference between the previous leverage and the new, smaller amounts, has not been as significant as to mean a large-scope reduction in trading volume for them.
On the matter of brokers opening up offshore branches, there have been reports of companies restructuring so they can obtain an offshore license and provide a higher-leverage service. However, there has not been a significant exodus from the Australian markets. It seems they are beginning to explore other means of offering their clients the higher leverage amounts. One of them is catering their services to larger clients.
Since the ASIC categorizes clients in two groups, retail and wholesale clients, with only retail ones having their leverage restricted, Australian brokers have tried to expand their services to the latter kind of client. This shift of focus towards more professional clients took place in the EU once the higher restrictions there took place as well. It seems that their impact was more severe there than in Australia.