August 3, 2017: Financial Commission, a leading External Dispute Resolution (EDR) organization, operated by FinaCom PLC, servicing online Forex and CFD brokerages and technology providers within the financial services industry, today announces support for the recent findings in a report published by Traction Fintech.
A recent article was published by regulatory compliance specialist Traction Fintech, which examined differences between over-the-counter (OTC) leveraged derivatives such as contracts for difference (CFD) including forex across four jurisdictions.
The full report referenced in the article was authored by James O’Neill, a director of the Australian-based broker ILQ and compared requirements related to client money handling, fair market pricing, leverage, and capital requirements across Australia, Cyprus, the United Kingdom (UK) and the United States (US).
Financial Commission supports the need for jurisdictions to improve rules surrounding client money handling and fair price discovery methods (such as the Global FX Code) to help uphold best execution at global forex and CFD brokerages, among other topics explored in the report.
Comparing Four Major Jurisdictions
A table in the article, which can be seen below, provides a high-level overview of the differences across each country and comes shortly after Australia’s government revised legislation under the Corporations Act related to how trust accounts are handled aimed to help safeguard client funds.
Fair pricing and execution
The author of the report noted that Cyprus and Australia underperform in ensuring fair and transparent pricing by brokers, compared to the United States and the United Kingdom, and suggested that Australia consider specific rules to address its mandate under rule 912(1)(a). For example, the current definition of market making in Australia is very general and would make it hard to contest asymmetric slippage in terms of infringing on the mandate.
The author added that the obligations in Cyprus’ regulations – namely article 36 of the Investment Services and Activities and Regulated Markets Law of 2007, go beyond the Australian equivalent when it comes to asymmetric price slippage when executing client’s orders (although both trailed behind the US and the UK).
In terms of comparing differences in how customer monies are handled in each jurisdiction by authorized brokerages, the author argued some of the advantages and disadvantages of allowing brokers to add capital to help buffer client’s accounts to avoid a shortfall.
Account buffering and trust account rules
For example, in the case of trust accounts in the US where buffering is permitted – a broker can commingle its own money into client’s accounts to help maintain excess capital and avoid a shortfall in the required margin (i.e. during periods of high volatility).
The author argued that commingling a broker’s own money into clients trust accounts could blur the line between the funds belonging to the trust and that of the broker’s money in the case of insolvency.
Meanwhile, brokers that can use client money to hedge and for margining purpose endorses the idea that not all brokers who are the counterparty to a client’s trade are acting as market-makers.
Furthermore, permitting the use of client funds for hedging and margining could blur the line between proprietary trading and the hedging that is common for a matched principal. The author also pointed out the systemic risk that exists with client segregated accounts when the funds are pooled together in the same account, and how this could be remedied if it was required that each client’s funds be held in a separate bank account.
Cathie Armour, a Commissioner at the Australian Securities and Investment Commission (ASIC) commented regarding the rule changes: “The amendments to the client money regime made in the Bill have strengthened the protection of client money that is provided to retail derivative clients. Doing so will help to increase investor confidence in the Australian financial system.”
Sophie Gerber, Director of Traction Fintech commented in the article, “This has been a very divisive issue in the industry. What may have been a more beneficial approach to this issue would be to have disallowed the use of the Corporations Act provisions for using client money for margining/hedging etc. with related parties and also prohibiting the payment of any form of conflicted remuneration in these relationships. Time will show us whether these reforms have or have not benefited the industry, I think, unfortunately, in this case, the retail client will not see any benefits, and over the next few years the outcomes will be reduced competition and increased costs.”
The author noted that despite the rule revisions client’s money is still pooled in the same bank account and not protected from counter-party risk in the case of broker insolvency. He added how ASIC’s prohibition of allowing a buffer contrasted with other jurisdictions where maintaining excess capital is required for instance in the US.
As leveraged forex and CFD trading are done from a margin account, the minimum margin requirements often vary from broker to broker with a wave of restrictions in recent years reducing the maximum leverage that can be offered in different countries.
The author explained that leverage is often blamed as the cause for clients’ losses, and while such restrictions have been put in place in many major jurisdictions, the UK has yet to put in place a cap. And while high leverage has been appealing for many traders, in jurisdictions such as Japan, a reduction of leverage doesn’t appear to have hindered its retail forex industry, as lower leverage may have instead helped it become a more accepted asset class for household investors.
The article cited an extensive list of industry news articles including announcements from regulators, to see the full article click here.