Australia’s Binary Options Ban and Forex Leverage Limit Proposal May Backfire

The Australian Securities and Investments Commission (ASIC) has been working on a permanent ban on binary options, which the Aussie overseer claims to have caused detrimental losses to Australian retail investors, and will continue doing so until a permanent fix is applied. According to the watchdog, last year Australian clients lost $490 million on binary options alone.

The essence of Binary options boils down to betting on the price of an instrument, be it a commodity, stock or currency, over a short period of time, and either win or lose from the gamble. The premise is simple, but one must have deep market knowledge to get lucrative results, otherwise the concept is no different than that of a game of chance, or as ASIC senior executive market supervisor Calissa Aldrige says:

“We don't see a legitimate service. In our mind, it's a gambling product.”

The solution seems simple enough: a restriction on binary options. In ASIC’s recent Product intervention: OTC binary options and CFDs Consultation Paper, which first introduced their intents, the regulator had this to say:

“Our proposed product intervention will effectively mean that binary options will no longer be lawfully available for acquisition by retail clients in Australia,”

In the same document, ASIC is also looking to apply certain restrictions on CFDs to retail clients, like enhancing CFD pricing transparency and implicating a negative balance protection. However the most noticeable is an introduction to a leverage limit, similar to the one enforced by ESMA (1:30) in Europe and the UK. Unlike ESMA, however, ASIC will apply a 1:20 leverage cap onto all currency pairs, major or minor. Furthermore, it suggests a ratio of 1:15 for Equity Indices, 1:20 for Gold, 1:10 for all other Commodities, 1:2 for Crypto, and 1:5 for Equities.

Australia has become one of several global hubs for financial markets, with more than a million clients, 99% of which are retail. Licensed brokers hold close to $2.9 billion of clients money for trading. The proposed solution will without a doubt cause some disadvantages to the industry in Australia, as more and more clients and brokers will turn their gaze towards offshore jurisdictions with looser financial regulators.

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