ASIC has made an interim stop order preventing Stratos Trading Pty Limited (trading as FXCM) from issuing contracts for difference (CFDs) to retail clients because of deficiencies in its target market determination (TMD).
ASIC acted because it was concerned that the TMD inappropriately included investors with a medium risk appetite in the target market for FXCM's CFDs.
ASIC considers that the risks associated with trading FXCM's CFDs, including leverage, volatility, liquidity and pricing risk, make them unlikely to be suitable for investors who have a 'medium risk appetite', regardless of any other investment criteria noted in the TMD.
The interim stop order prohibits FXCM from issuing CFDs to retail clients and opening trading accounts for new retail clients to trade in those CFDs. It covers CFDs issued by FXCM that reference the following underling asset classes:
- currency pairs and forex baskets
- treasuries and commodities
- stock indices
- stocks and stock baskets, and
- cryptocurrencies.
ASIC made the interim order to prevent FXCM from issuing CFDs to retail clients, where distribution of the products is unlikely to be consistent with the financial objectives, situation or needs of consumers in its target market. The order does not prevent FXCM's existing clients from varying or closing their CFD positions.
The order is valid for 21 days unless revoked earlier.
Background
Under the design and distribution obligations (DDO), financial product issuers must define an appropriate target market for a financial product offered to retail clients, having regard to the risks and features of the product. Issuers also need to consider how their product will be distributed and specify appropriate conditions on distribution conduct so that the product is directed to the target market and is unlikely to be acquired by consumers outside the target market.
CFDs are leveraged derivative contracts that allow a client to speculate in the change in value of an underlying asset, such as foreign exchange rates, stock market indices, single equities, commodities or crypto assets.
ASIC's product intervention order for CFDs strengthened consumer protections after reviews in 2017, 2019 and 2020 found that most retail clients lose money trading CFDs (refer 20-254MR). In April 2022, ASIC extended this order for a further five years to 23 May 2027 (refer 22-082MR).
On 6 September 2023, ASIC released Report 770 Design and distribution obligations: Retail OTC derivatives (REP 770), outlining how issuers of retail OTC derivatives are meeting DDO and highlighting areas for improvement, including their over-reliance on client questionnaires as a primary distribution filter and making greater use of available data to assist the distribution arrangements.
On 10 September 2024, ASIC released REP 795 Design and distribution obligations: Compliance with the reasonable steps obligation (REP 795), outlining our key observations on how issuers of high-risk products including CFDs are complying with the reasonable steps obligation and highlighting further areas for improvement.
ASIC's Moneysmart website has further information about forex trading and CFDs.
