Contracts for difference (CFD) providers must do a lot more to ensure that investors including self-managed superannuation funds (SMSF) understand the risks involved in trading the complex financial products, an ASIC study has found.
"We have monitored the CFD market for some time because of the complex nature of these products and the risks involved," ASIC commissioner Greg Medcraft said.
"Our health check study shows CFD issuers need to lift their game in making sure investors understand how CFDs work and are aware of the very significant risks when trading these complex financial products."
ASIC's report made recommendations for future actions including: enhancing disclosure in the CFD market, continued monitoring of CFD advertising and publication of an investor guide to boost investor understanding of the CFD market.
Law reform is also possible if the actions deliver an unsatisfactory outcome.
ASIC's study found that retail investors are confused about how CFDs work and do not understand the risks in trading them.
They also do not seek financial advice before investing in them and often do not get sufficient information to make informed decisions about trading CFDs.
"Qualitative research also revealed some investors are trading CFDs within their SMSFs, and some investors are using their retirement savings as trading capital," ASIC's study said.
"These behaviours are all a cause for concern as the highly leveraged nature of the product means that small market movements could easily result in margin calls which traders may be unable to meet."
ASIC wants investors to get a clearer picture of what they are getting involved with and to ensure CFD providers are honest and upfront with investors about the risks involved, Medcraft said.
