Australian-owned providers of contracts for difference (CFDs) are concerned that foreign-owned providers will profit from misunderstandings about use of client money due to misinformation regarding the two camps' different business models.
FP Markets, AxiTrader and Pepperstone have approached Treasury and ASIC to outline the downside of proposals advanced by the Australian CFD Forum - comprised solely of mostly United Kingdom-owned companies.
Speaking for the three Australian companies, FP Markets managing director Matt Murphie said the crux of his group's criticism of the CFD Forum's proposals was that they favoured the Market Maker (MM) business model of the Forum's foreign-owned members over the financial interests of the clients whom they were supposed to be representing.
FP Markets, AxiTrader and Pepperstone had a direct market access (DMA) business model, Murphie said.
ASIC, in its November 2010 guide "Thinking of trading CFDs?', defined the DMA model as one where the CFD provider "places your order into the market for the underlying asset. The price you pay will be determined by the underlying market".
In the same guide, ASIC defined the (MM) model as one where "the CFD provider comes up with their own price for the underlying asset on which the CFDs are traded ... the CFD provider may directly benefit if you lose on your trade".
Murphie said that CFD providers from the UK "come from a spread-betting origin which requires market making to cover a duty payable to the UK tax office (Her Majesty's Revenue & Customs [HMRC]).
The duty is calculated as 3 per cent of net client losses. Spread betting enables clients to receive trading gains free of capital gains tax.
"This does not exist in Australia as Australian companies come from a broking origin. The preference of model is seen in that all Australian-owned businesses, and notably CommSec and Etrade opted to white-label a DMA CFD model. In contrast, in the UK many large businesses, including banks such as Barclays, have opted to white-label a MM CFD model to offer spread betting," he said.
Murphie said proposals by the Forum's lobbyists "effectively force firms to take risk against clients".
Despite this, the Australian-owned firms agreed - in principle - with some of the Best Practice Standards put forward to Treasury and ASIC by the largely foreign-owned Forum members.
However, the Australian DMA group was concerned that Standard number seven raised concerns regarding the requirements for the segregation of client money, which effectively required firms to run risk against its clients.
"DMA CFD firms have opted to align their interests with clients and as such, the Australian CFD Forum does not include a single Australian company," Murphie said.
The Australian-owned businesses using the DMA model were recommending to Treasury and ASIC: that firms not to be allowed to use one client's money to subsidise another client's loss; that there be appropriate capital requirements for CFD firms, commensurate with the amount of money they hold on behalf of their clients.
The groups also recommended where a client's funds were used for hedging purposes, the firm must hold a percentage in company cash in a trust account in the event of insolvency; client money cannot be used for any other purpose other than hedging client positions; and there should be daily reporting of positions to ASIC.
Treasury and ASIC were not available for comment at the time of InvestorDaily's deadline.
