Principles

Members should have the objectives of:

• facilitating client education of the member’s terms and service offerings, by providing free of charge demonstration / practice accounts;
• systematically appropriately assessing the suitability of prospective clients for dealing in the member’s financial products and;
• screening for prospective clients who are unsuitable for the member’s financial products

Members should have the objectives of:

• clearly describing to prospective and current clients how they may fund their account and the risks of payment methods
• clearly describe any differences applying to initial funding of accounts, such as upper limits on the amounts that may be paid by credit card to establish an account.

Explanatory note:

1. ASIC’s benchmark disclosure guidance focusses on initial funding of accounts. The Association considers it is more prudent to ensure the disclosures apply to every stage of the client’s funding of their account.

Members should have the objectives of:

• clearly and consistenly describing the member’s policy on treatment of client moneys and in particular avoid any misleading or deceptive departure from the statutory use of the term;
• clearly and concisely describing the member’s legal rights and obligations regarding adjusting the client’s account for realised and unrealised gains and losses (referred to as “revaluing the client’s account);and
• withdrawing client moneys consistently with the member’s terms for paying for client’s margin obligations, adjustments for revaluing the client’s account, fees and charges and client withdrawals.

The member’s risk on each client’s credit affects the member’s financial resources and so in turn indirectly potentially affects all other clients.

The member’s credit risk on each client inter-relates with the leverage permitted for the clients, the margining of the client (if any), policies on closing out automatically or otherwise), the degree of hedging with the member’s counterparties and the member’s credit risk on the counterparties.

The Association believes there should be no prohibition on business models by way of direct or indirect regulation. Law reform should focus on evidence-based problems and solutions.

Until there is evidence-based law reform, members should have the objectives of:

• managing leverage rates and size positions available to clients appropriate to the client, the business model and the member’s counterparty risk;
• monitoring in real time individual client risk (by reference at least to positions and client moneys);
• monitoring total client risk at least daily (by reference at least to positions, client moneys, market risk and counterparty positions);
• rigorous compliance with policies and procedures for margining (if any) and closing out positions;
• clear and concise disclosures to clients on rates, limits, orders, margining and margin cover requirements.

Members should have the objectives of:

• clear and concise disclosures to clients on trading conditions (e.g., lapsing of orders, tick sizes, margin cover changes outside of exchange hours);
• in the event of a trading halt in or suspension of a CFD’s underlying security, not allowing new CFD positions to be opened;
• making available, for client’s choice, effective trading risk management tools;
• clear and concise disclosures to clients on the member’s discretions; and
• fair and reasonable treatment of client positions in the course of exercising the member’s discretions (e.g., revaluing and repricing after market evernts).

Members should have the objectives of:

• selecting prospective counterparties appropriate for the member’s business model, having an appropriate degree of financial capacity, trading service performance, interaction with the member’s systems;
• having scheduled and systematic monitoring of counterparties;
• clearly and concisely describing to prospective and current clients the role of counterparties in the member’s business model and any particular arrangements for trading, such as related parties or any liquidity allocation network;
• optimally managing margin paid to the member’s counterparties so as to minimise close out risk and the risk of shortfalls arising from counterparty default;
• maximising the capacity for margin payments from the counterparty to be translated into client moneys by way of client account revaluation in accordance with the member’s policies and procedures.

Explanatory notes:

1. PDS requirements already impose on members substantial disclosure obligations regarding the member’s business model, hedging, counterparty risk management. The Association believes the Principles should not duplicate the statutory obligation already imposed on members.
2. Simple law reform can provide a solution to optimising client protection by way of a clear statutory trust over counterparty receivables. Some members may choose to anticipate such simple law reform by their own arrangements for protecting the interests of clients.

Members are already obliged by ASIC Class Order and their licence conditions to meet certain minimum requirements for net tangible assets (NTA) and for surplus liquid funds. Members are also required to maintain sufficient financial resources to conduct their financial services. These and related PDS disclosure benchmarks are described in ASIC Regulatory Guides. The Association believes that the Principles should not duplicate the existing obligations on members.

The Association believes the ASIC Class Order requirements and licence conditions can be reformed to provide better solutions for client protection by way of addressing features that have emerged from evidence in Australia and overseas of industry issues.

Until there is evidence-based law reform, members should have the objectives of:

• at all times prudently exceeding the required minimum levels of net tangible assets and surplus liquid funds;
• managing operating funds and margin paid to the member’s counterparties so as to meet obligations to clients based on stress testing for significant adverse market movements; and
• rigorous and effective monitoring of assets including receivables from clients and counterparties so as to maintain solvency and liquidity throughout significant adverse market movements and significant adverse client shortfalls which potentially could occur within the member’s client credit risk policies.

Explanatory notes:

1. Some member’s client credit risk polices are designed to avoid any client shortfall. Such business model policies require greater adherence to trading risk management, since there should be no client shortfalls.
2. The Association expects to develop more details for the voluntary code for capital ratios and client asset/liability interpretation. These features are not currently addressed by ASIC Class Orders or licence conditions, or at least not sufficiently clearly and uniformly. These aspects are appropriate for urgent law reform. The Association expects that any further details for this Principle would be suitable for industry-wide adoption under law reform.