FMA will consult on how to limit leverage in derivatives trading. ASIC extends ban to the distribution & issue of binary options to retail investors until 2031
From May 2021, the Australian Securities and Investments Commission (ASIC), has extended a ban on binary options being distributed to retail speculators. It did this from October 2031.
Binary options brokers (OTC derivatives) allow people to speculate on the possibility of an event occurring or not within a given time frame. This could be a movement in the price or a market index, or an economic event like central bank interest rate changes.
ASIC says in the 13 months before its ban took effect, retail speculators/investors incurred significant aggregate net losses trading binary options. According to ASIC, 74%-77% of active retail clients lost money when trading binary options. Retail client accounts suffered net losses totalling A$14,000,000, while loss-making retail client accounts suffered losses totalling A$15.7 Million. Profit making retail client account accounts had net profits of A$1.7million.
“Binary options, which are high-risk financial products that can be harmful and potentially dangerous, have caused millions of dollars in losses to retail investors since our ban. “This important protection for retail investors will be maintained by extending our binary options ban to 2031,” Karen Chester, ASIC Deputy Chair says.
ASIC states that the extension of its ban via a product interference order was approved by Stephen Jones, Australia’s Assistant Treasurer, and Minister for Financial Services.
A spokesperson for the Financial Markets Authority (FMA), New Zealand, stated that they don’t have product intervention powers similar to ASIC’s.
“However, we have noted on page 11 of our Annual corporate plan: Derivative issuer standard conditions – We will consult to establish a new standard for derivative issuers in order to limit leverage. We are concerned about the level of leverage as it can increase an investor’s risk. This issue was flagged as high-risk in our 2020 derivatives sector risk assessment. This has informed our monitoring and analysis of the sector,” a FMA spokesperson said.
The FMA has warnings about binary options on its website.
The FMA explains that binary options are also known as ‘all or nothing’, fixed return options’ or even ‘digital options. They allow you to make or lose money by forecasting short-term movements in the price a share, commodity or currency.
“In most cases, the time frames are very short so you won’t need to wait long before making your call. In some cases, it may take less than one minute. You might bet that a share will trade at a higher price within the hour. You could win a certain amount of money if you guess correctly. You would lose any money invested if you guess wrong.
ASIC claims that its ban, which was implemented in May 2013, has prevented retail clients from trading binary options in Australia.
ASIC states that “ASIC’s extension to the product intervention order ensures that binary option protections remain in Australia in line with those in place in comparable markets abroad.”