ASIC warning for issuers of high-risk derivatives products

The news: Financial regulator ASIC has warned issuers and distributors of high-risk derivative products it will take action if they don’t meet their demand and distribution obligations.

The numbers: Over 60 Australian financial services licensees offer complex, high-risk over-the-counter derivatives such as contracts for difference (CFDs), crypto derivatives and other novel derivative arrangements to retail clients in Australia. ASIC’s latest review, released on Wednesday, found that most retail clients lose money trading CFDs.

The context: The watchdog says its review found “significant room for improvement” in how issuers meet their design and distribution obligations (DDO), which were put in place in 2022. It said there is over-reliance on client questionnaires as a primary distribution filter, and warned against mass marketing of OTC derivatives. It also asked issuers to make greater use of available data to assist the design and target market determinations of derivative products. ASIC’s warning follows its recent legal proceedings against online broker eToro over breaches of DDO in relation to its high-risk CFD trading product.

“These are high risk products which mean a range of controls are likely needed to ensure they get to the right consumers in their ‘niche’ target markets. We know the stakes are high for resulting harms if they end up with consumers outside of their stated target markets,” ASIC Deputy Chair Karen Chester said.