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Why ASIC is enforcing tougher forex regulations in 2021

Why ASIC is enforcing tougher forex regulations in 2021

This is a commercial collaboration with Compare Forex Brokers.

The Australian Securities and Investments Commission (ASIC) will be enforcing tougher retail Contract for Difference (CFD) and forex trading regulations in 2021 in a bid to decrease the risk of investors being exposed to volatile assets and unpredictable markets following the COVID-19 global pandemic.

An ASIC report released in May 2020 explained that Australian retail brokers were turning over twice as much income as the six months prior - thereby magnifying the risk of losing money due to trading with high leverage.

During the peak of the pandemic, retail brokers' averaged a daily turnover of $3.3 billion, up from $1.6 billion. The spike in trading activity could be attributed to the fact that new accounts were being created at a higher rate than before the pandemic, while dormant accounts were also returning to the market - accounting for 21.63 per cent of all active traders.

The new regulations, set to come into effect from 29 March, can be divided into three main sections:

1 Reduced maximum leverage

ASIC believes the current leverage for retail CFD and forex trading is too high, resulting in individuals being exposed to unsuitably high risk. ASIC has announced a huge reduction in the maximum leverage that brokers can offer retail traders, to 30:1 from 500:1.

Reducing leverage will reduce the risks associated with trading, making it harder to make large profits and losses. This will help protect traders, but some individuals who require high leverage (such as automation traders) may choose brokers regulated overseas, or even unregulated brokers.

Tougher regulations are aimed at decreasing the risk for investors following the COVID-19 global pandemic.

2 Increased trader protection

The second change is that of stricter trader protection regulations. Presently, ASIC requires brokers to separate all clients' funds from company funds into segregated bank accounts. As of March, however, brokers will be obligated to provide investor protection rules and close out all of a traders' open positions, prior to them losing all their money. Additionally, all Australian brokers will need to protect their customers against negative account balances, known as negative balance protection (NBP).

3 No promotional inducements

Some brokers in Australia offer rewards for activities such as signing up to a broker, referring a friend, or trading high volumes. These incentives can attract vulnerable investors who are not aware of the high-risk nature of CFD trading. From March next year, ASIC will prohibit certain types of promotions or incentives, and brokers will not be able to induce customers to open or fund a trading account through rewards, free gifts, spread rebates, and bonus credits.

With all these changes, it is important potential investors are fully aware of the risks and nature of trading.

With all these changes coming into play, it is important that potential investors are fully aware of the risks and nature of trading prior to entering the forex world. A website such as Compare Forex Brokers helps to shortlist brokers by recommending the best forex brokers based on factors including ASIC regulations, spreads, trading commission, leverage, reviews, customer support, range of markets and currency pairs. This ensures investors enter the game armed with the tools and knowledge required for a successful trading of CFDs.

This a commercial collaboration with Compare Forex Brokers.