ASIC Introduces New Rules for CFD Trading
Following the turbulent market conditions of 2020—when many retail traders suffered heavy losses due to excessive leverage offered by some CFD brokers—the Australian Securities and Investments Commission (ASIC) introduced a product intervention order aimed at strengthening investor protection in the CFD market.
The new regulations came into force on March 29, 2021. The measures introduce several important changes, including limits on leverage, mandatory negative balance protection, standardized margin close-out rules, and a ban on promotional incentives used to market CFD trading to retail clients.
These reforms mirror similar regulatory actions previously implemented in the United Kingdom and the European Union. The intervention order is set to remain effective for 18 months, after which regulators may decide whether to extend it or convert it into a permanent framework.
The changes may affect traders who use brokers regulated in Australia or brokers that onboard clients through an ASIC license. This includes widely known platforms such as Pepperstone, Saxo Bank, IG, markets.com, FXCM, XTB, City Index, and CMC Markets, among others.
Overall, these regulatory updates are widely seen as beneficial for the industry and for everyday retail traders. However, investors who previously relied on very high leverage may find their trading strategies somewhat restricted under the new rules.
Negative Balance Protection
One of the most important elements of the reform is negative balance protection. This rule ensures that traders cannot lose more money than the amount available in their trading account. In other words, even during extreme market events or unexpected price movements, clients will never owe additional funds to their broker beyond their deposited balance.
Changes to leverage caps
A key change is leverage restrictions, which will affect the amount of margin retail clients are required to deposit to open any new CFD or FX positions from 29 March onwards. Specifically:
- 30:1 leverage on major currency pairs (any two of the Australian dollar, British pound, Canadian dollar, Euro, Japanese yen, Swiss franc and US dollar)
- 20:1 leverage on major indices, gold and minor currency pairs (major stock market indices are the CAC 40, DAX, Dow Jones Industrial Average, EURO STOXX 50 Index, FTSE 100, NASDAQ-100 Index, NASDAQ Composite Index, Nikkei Stock Average, S&P 500 and S&P/ASX 200)
- 10:1 leverage on commodities (excluding gold) and minor indices
- 2:1 leverage on cryptocurrency assets
- 5:1 leverage on shares or other underlying assets
Compulsory margin close outs
From 29 March, if the funds you hold in your account fall to less than 50% of the margin required for all of your open trades, then your brokers will be required to close out positions.
Any existing positions opened prior to 29 March will also be subject to the new 50% margin close-out requirement. This means that you may need to deposit more funds into your account to cover the additional margin required and to avoid your positions being closed out. It’s your responsibility to monitor your positions.
Pepperstone uses the following example to demonstrate this change:
You’re trading AUDUSD and the margin currency is AUD. You have an account with a balance of $1,000 and you enter a trade of 1 standard FX lot ($100,000) at a leverage of 500:1 (before the ASIC changes take effect). The initial margin requirement is 100,000/500 (leverage) = $200. This is the amount you need to open the trade.
Currently, once the trade is opened, you are required to maintain a minimum of 20% of the value of the initial margin in your account, otherwise you’ll be closed out, 20% of $200 = $40. If your account balance falls to $40 or less, the trade will be closed out automatically.
After ASIC’s changes take effect, even if you opened the trade before 29 March, your equity will need to be a minimum of 50% of the initial margin, 50% of $200 = $100. This is a $60 increase from before the rules came into effect.
Let’s say the market unfortunately moves against you and you incur a loss of $910, meaning you have $90 of equity left in your account ($1,000 – $910) and your Equity/Margin ratio is 45%: equity ($90) ÷ initial margin ($200) = 45%.
Under the current rules, your trade wouldn’t be closed. However, under the new rules, your equity has dropped below the 50% requirement and your trade will be automatically closed out.
To avoid the trade closing out, you’ll need to add additional margin to your account before the 50% close-out ratio is reached.