ASIC calls on retail OTC derivatives issuers to lift standards and address regulatory concerns

ASIC recently undertook a surveillance of the retail OTC derivatives sector, which has an estimated annual turnover of $11 trillion and over 450,000 investors in Australia. ASIC has released Report 579 here in which it identifies sector-wide issues with certain practices, including: 

• misleading marketing materials
• unclear pricing methodologies, particularly around cryptocurrency CFDs
• inadequate risk management practices including in relation to white labelling
• inadequate monitoring of counterparties including in the context of hedging arrangements
• inappropriate referral arrangements which may breach the ban on conflicted remuneration.

ASIC has called on issuers to raise industry standards and improve compliance, including by: 

• reviewing and updating their risk management and client money practices
• assessing whether their arrangements with counterparties and referrers meet their AFS licence obligations.

ASIC placed particular focus on the developing market for cryptocurrency CFDs and the pricing volatility associated with fluctuations in the underlying assets and added leverage. ASIC stated that pricing and hedging risk from underlying cryptocurrency assets can also be challenging. Issuers that offer cryptocurrency CFDs, in ASIC’s view, need to make sure their clients understand the pricing and risks associated with these products. They also need to make sure they have adequate risk management frameworks and capital to deal with these risks.

ASIC plans to examine this area further as part of its ongoing focus on the sector. Accordingly, issuers would be well-advised to take proactive steps to address ASIC’s areas of concern.