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What new CFD rules mean for traders


Buying stocks.

Traders will no longer be allowed up to 500:1 leverage on CFDs or forex positions.

Australia's corporate watchdog has officially announced new restrictions on CFD brokers to cap the amount of money customers can lose when trading contracts for difference (CFDs).

The rules, which come into effect from March 29, 2021, include limits on the leverage that can be offered on CFDs (including forex) as well as new protections that stop traders from losing more than what they have in their account.

The caps vary depending on the underlying asset, with cryptocurrencies facing the highest limit at 2:1 maximum leverage and major currency pairs (forex) offering the highest possible ratio. Here are the new limits starting 2021:

      • 30:1 for major currency pairs
      • 20:1 for minor currency pairs, gold or major stock market indices
      • 10:1 for commodities (other than gold) or minor stock market indices
      • 5:1 for shares or ETFs
      • 2:1 for crypto-assets

CFDs are derivative investment products that allow you to trade stocks, forex, crypto and commodities using leverage. Rather than buying and selling the underlying asset, CFDs allow you to bet on the price movements of stocks and other assets on borrowed funds.

They're riskier than trading shares directly because it's possible to lose more than your initial investment as both profits and losses are amplified.

Margin trading has become increasingly mainstream over the last few years. Popular apps like Robinhood and eToro allow retail investors to trade shares, cryptocurrency, forex and commodities using leverage – commonly through CFDs in Australia.

However there's also been new focus on the dangers that CFD trading presents to uninformed investors. A recent review by ASIC found that while many CFD issuers profited enormously from derivatives products, up to 72% of CFD customers lost money, including 63% of forex traders.

In a press release today, ASIC Commissioner Cathie Armour said the high losses experienced by retail investors during the market volatility this year highlights the need for stronger protections for retail traders.

"The leverage ratio limits in the order aim to reduce the size and speed of retail clients’ losses by reducing CFD exposure and sensitivity to market volatility. This follows similar measures introduced in major overseas markets, including the United Kingdom and European Union," said Armour.

How will traders be impacted?

The changes will only impact you if you trade CFDs or forex, however there's a good chance your broker will have already implemented the restrictions before now.

The new rules have been years in the making and were flagged in some detail last year. Many brokers, such as Saxo Capital Markets and CMC Markets, have taken action months or even years ahead of today's announcement. That being said, it pays to reach out to your broker for clarification on any changes they're introducing over the coming months.

Prior to the update, brokers could choose to offer leverage of up to 500:1 to clients, meaning a trader could open a position worth 500 times what they'd invested. For instance, a $1,000 deposit at 500:1 leverage is equal to a trade value of $500,000.

This high level of leverage has meant traders could lose considerably more than what they invested or is available in their account. From March, losses will be limited to the amount of funds sitting in a traders CFD account.

Finder has reached out to several CFD brokers for comment, many who are still processing the updates. We'll share more details as we get them.

Want more information around how CFDs work in Australia? Check out our guide on CFDs, how forex trading works and what the risks are.

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.

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