Australia is being “picked off” by online foreign exchange brokers that are able to obtain a local licence and offer clients extremely high leverage of up to 500 times, Australia’s corporate watchdog the Australian Securities and Investments Commission (“ASIC”) says.
Mr Greg Medcraft, chairman ofASIC, said the issue had been raised with the country’s top financial regulation forum, which comprises ASIC, the Reserve Bank, Treasury and the Australian Prudential Regulation Authority.
“We’ve discussed this more globally, and we are being picked off as a jurisdiction that allows very high leverage, 500 to 1,” Mr Medcraft said at a parliamentary hearing on Friday. “We’re doing what we can in terms of vetting those who apply for licences in this area, particularly those that don’t have a [true] connection with Australia that are operating outside of Australia.
“It is an issue that’s been discussed recently at the Council of Financial Regulators.”
Asked if participants in the foreign exchange market were sophisticated enough to understand the risk, ASIC Commissioner Cathie Armour said there was an “open issue”whether Australia should take the approach of other countries about limiting the amount of leverage.
The US, Japan and Hong Kong have capped leverage. The watchdog has taken action against some Australian-based brokers. In October 2014, ASIC forced one of Australia’s foreign exchange brokers, Pepperstone, to exit the Japan market, after it was found not to have the appropriate licence. Pepperstone was offering clients leverage of up to 400 to 1, significantly above the regulatory maximum in Japan of 25 to 1.
Given the high leverage allowed in foreign exchange trading, ASIC’s Ms Armour said Australia was “quite fortunate” that brokers here had been able to operate effectively during the significant shock caused by the de-pegging of the Swiss franc in January.
High leverage creates the potential for greater profits, but also greater losses. January’s 30 per cent spike in the Swiss franc after its central bank dropped a peg with the Euro was one of the most dramatic moves ever in currency markets, and resulted in widespread losses for traders, brokers and investment banks.
For a trader with 400 times leverage, the instant 30 per cent move resulted in a 1200 per cent loss, which exceeded the balance of most traders. FXCM, the world markets’ largest online foreign exchange broker, was forced into a distressed sale while British-based Apari declared insolvency.
The popularity of online foreign exchange trading has surged as technology has allowed individuals to bet on currency moves. Daily turnover has more than doubled from $136 billion to $380 billion since 2007 as speculators opt to trade foreign exchange markets that operate 24 hours a day. But foreign exchange markets are largely operated on the often opaque and unregulated over-the-counter basis.
Australia has become a hotbed of the global retail forex broking industry by virtue of its trading culture, and a safe jurisdiction for locally based players to market themselves to traders around the world. Such is its popularity that daily turnover at some of Australia’s largest brokers can exceed the entire cash equities volume of the Australian Stock Exchange on a given day.
THE SYDNEY MORNING HERALD
23 March 2015