ASIC Warns Retail OTC Industry Over Conduct

The Australian Securities and Investments Commission (ASIC) has called on participants in the retail OTC derivatives sector to improve their practices after recent ASIC activities showed their conduct “fell short of expectations”.

The products offered by retail OTC derivatives issuers in Australia include binary options, margin foreign exchange and contracts for difference.

ASIC says that a recent review of 57 retail derivative issuers identified a number of risks associated with the products offered to retail investors by OTC derivatives issuers.

The review found that client losses in retail OTC derivatives trades “seemed high”, with the percentage of unprofitable traders being up to 80% for binary options, 72% for CFD traders and 63% for margin FX traders. “ASIC will examine this area further as part of its ongoing focus on the sector,” it warns.

ASIC adds that its recent supervisory activities have also revealed sector-wide concerns about certain practices. 
The most concerning practices include actual client profits being inconsistent with marketing materials; a lack of transparency around pricing; risk management practices that relied on the use of client money were outdated and needed to be reviewed; and some referral arrangements that may be in breach of conflicted remuneration requirements and referral selling prohibitions.

It adds that some issuers that were providing wholesale services or allowing third parties to white label their products did not have adequate risk management practices and operational capital to supervise counterparties and support their exposures.

ASIC highlights binary options as possibly being the least transparent in terms of underlying pricing, strike prices and payout structures and the regulator has called on issuers to review and update their risk management and client money practices, as well as assess whether their arrangements with counterparties and referrers meet their AFS licence obligations.

“The retail OTC derivatives sector in Australia is an active and growing market, with an annual turnover of $11 trillion and over 450,000 investors,” says ASIC commissioner Cathie Armour. “The integrity of the retail OTC derivatives sector is a key focus for ASIC. 

“ASIC expects licensed issuers to conduct themselves appropriately and ensure consumers trade in retail OTC derivatives with a clear understanding of the products and the risks to which they’re exposed,” she adds. “We will be working with issuers to raise industry standards and improve compliance with their Australia financial services licence obligations.”

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Colin Lambert

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