Australia moves to close crypto derivatives loophole after retail traders lose A$458 million

Australia’s financial markets authority has put forward a plan to widen retail leverage caps to encompass crypto-settled derivatives as part of an effort to address mounting investor losses in speculative financial instruments.

The Australian Securities and Investments Commission (ASIC) announced on Oct. 12 that it aims to broaden its current contracts-for-difference (CFD) regulations to include applicable derivatives settled via digital assets. This move is designed to eliminate a regulatory loophole that allows economically comparable products to operate under varying restrictions.

This initiative follows ASIC data showing that 68% of retail CFD clients incurred losses throughout the 2023–24 financial year. Total losses surpassed A$458 million ($325 million), which includes A$73 million charged in fees. These statistics encompass CFD trading across all asset classes rather than focusing solely on cryptocurrency derivatives.

Furthermore, the Australian regulator is pursuing a ten-year extension for its existing investor safeguards, which would keep them active until 2037 pending government clearance.

Australia targets leveraged crypto products and margin practices

ASIC’s current framework generally regulates CFDs when transactions settle in cash or through offsetting obligations between counterparties.

Nevertheless, certain derivatives sharing identical features can settle via digital asset transfers, potentially exempting them from the active product intervention order.

To address this, ASIC seeks to remove the distinction by broadening the definition to cover qualifying digitally settled contracts, regardless of whether their underlying exposure involves cryptocurrencies, traditional assets, market indices, or interest rates.

Implementation of these changes could compel impacted brokers and derivatives venues to comply with established leverage caps, standardized margin close-out protocols, negative balance protections, and restrictions on marketing incentives.

For CFDs tied to cryptocurrencies, the prevailing maximum retail leverage stands at 2:1, requiring investors to supply a minimum initial margin equal to half the position’s value.

Other instruments face different thresholds based on their underlying assets, spanning from 5:1 for equities up to 30:1 for major currency pairs.

Consequently, the proposed expansion relies on a derivative’s underlying exposure and contractual design, rather than automatically applying the cryptocurrency leverage limit to every product settled in digital assets.

Certain fixed-expiry crypto futures and options contracts would stay outside this regulatory structure.

Alan Kirkland, ASIC Commissioner, noted that current limitations have meaningfully lessened investor harm, chiefly by curbing excessive leverage.

During the initial six months following the implementation of these protections in March 2021, total quarterly retail losses fell by 91%, dropping from A$372 million down to A$33 million.

The agency also noted an 87% decrease in quarterly margin close-outs, though subsequent assessments indicated that the majority of retail CFD traders still suffered net losses.

The fresh proposals from ASIC also seek to tighten the methods brokers use to calculate initial margin. This follows a broader industry inquiry that uncovered firms offsetting clients’ opposing trading positions to lower collateral requirements.

Under the revised guidelines, brokers would be required to compute the minimum margin independently for every single CFD, barring them from leveraging one position to decrease the initial collateral needed for another.

The regulator reported that its enforcement regarding margin-netting practices prompted 28 issuers to issue refunds exceeding A$36 million to affected retail clients.

Additional modifications focus on options-linked CFDs, where investor losses have proven particularly severe.

ASIC discovered that 85% of retail participants trading options-based CFDs lost money during the 2023–24 period. This finding has driven proposals to refine margin rules and evaluate whether certain products should remain accessible to everyday investors.

The agency is actively gathering evidence regarding contracts capable of exposing traders to losses that exceed the initial options premium, such as structures carrying potential unlimited downside risk.

No final determination has been reached regarding whether these specific instruments will encounter further limitations or a total ban.

Additionally, Australia’s ASIC intends to enforce stricter criteria for promotional discounts, mandating that qualifying offers be made available to retail clients on substantially equal terms and displayed prominently across broker websites and trading platforms.

Under the draft rules, firms would need to maintain records of qualifying discounts for a duration of seven years following the conclusion of the promotions, while ensuring educational and research tools are not leveraged to encourage prohibited trading behaviors.

The existing CFD intervention order is scheduled to lapse on May 23, 2027. ASIC contends that a subsequent 10-year prolongation would grant firms greater regulatory clarity while maintaining the regulator’s authority to dismantle the restrictions sooner if necessary.

Nonetheless, the proposed revisions are still open for consultation, meaning industry feedback could shape their ultimate scope.

ASIC is accepting submissions from brokers, trading venues, and consumer advocacy organizations until Nov. 9. Requested input includes details on which digitally settled assets would be impacted, anticipated compliance costs, and whether businesses would require a transition window.

?Frequently Asked Questions

01What are CFDs?

Contracts for difference (CFDs) are leveraged financial derivatives that allow traders to speculate on price movements of underlying assets without owning them directly.

02Why is ASIC proposing these changes?

The changes aim to close regulatory loopholes and curb significant retail investor losses associated with high leverage and risky financial products.

03What is the proposed leverage limit for crypto CFDs?

The current maximum retail leverage for CFDs referencing cryptocurrencies is 2:1, requiring investors to provide at least 50% of the position’s value as initial margin.