FMA to consult on limiting leverage in derivatives trading as ASIC extends ban on the issue & distribution of binary options to retail speculators until 2031

The Australian Securities and Investments Commission (ASIC) is extending a ban on the issue and distribution of binary options to retail speculators it introduced in May 2021 until October 2031.

Binary options are over-the-counter (OTC) derivatives that let people speculate on the occurrence or non-occurrence of a specified event in a defined timeframe. This can include an event related to movements in the price of a financial product, a market index or an economic event such as central bank interest rate decisions.

ASIC says in the 13 months before its ban took effect, retail speculators/investors incurred significant aggregate net losses trading binary options. It says 74% to 77% of active retail clients lost money trading binary options, retail client accounts made net losses of A$14 million in aggregate, and loss making retail client accounts made net losses totalling A$15.7 million, while profit making retail client accounts only made net profits of A$1.7 million.

"Binary options are harmful, high-risk financial products resulting in millions of dollars in losses for retail investors before our ban. Extending our binary options ban until 2031 ensures this important protection for retail investors will continue," ASIC Deputy Chair Karen Chester says.

ASIC says the extension of its ban, via a product intervention order, follows approval via Stephen Jones, Australia's Assistant Treasurer and Minister for Financial Services.

Here in New Zealand a Financial Markets Authority (FMA) spokesman says the financial markets regulator doesn't have product intervention powers like ASIC's.

"However, as noted in our recent Annual Corporate Plan (on page 11): Derivative Issuer standard condition – We will consult on a new derivative issuer standard condition to limit leverage. The level of leverage is an area that we are concerned with as it can compound an investor’s potential loss. We flagged this as a high-risk issue in our 2020 derivatives issuer sector risk assessment, which has informed our monitoring of the sector," the FMA spokesman says.

On its website the FMA also has a warning about binary options, noting they "are very high risk, even for experienced investors."

"Also called 'all-or-nothing', 'fixed return options' or 'digital options', binary options enable you to make, or lose, money by predicting the short term movements in the price of a share, commodity, currency or index," the FMA says.

"Usually, the timeframes are short and you don’t have long to make your call – in some cases less than a minute. For example, you might put money on your guess that a share will trade above its current price in the next hour. If you guess correctly you could ‘win’ a fixed amount of money. If you guess incorrectly you would lose the money you invested."

Meanwhile, ASIC says since its ban came into effect in May last year, it has been fully effective in preventing retail clients from losing money trading binary options in Australia.

"ASIC’s extension of the product intervention order ensures binary option protections in Australia remain in line with those in force in comparable markets overseas," ASIC says.