Is Forex trading in Australia Legal?
foreign exchange firms are selling the dream of instant riches. It is a booming trade which has doubled in size since 2007, and is now turning over $380 million a day.
But for hundreds of Australia’s 51,000 mum and dad retail forex traders, that dream has turned into a nightmare.
The ForexSQ can reveal that more than 100 retail forex traders in Australia – often small investors who dabble in the forex market in their spare time – have suffered massive losses on their trading accounts.
Several are in the hundreds of thousands of dollars and, in at least two cases, those losses have climbed above $1 million.
Now, some of them are being chased by their foreign exchange brokers to pay out those losses.
Australian Forex traders lose millions
“If I were to pay for the negative balance, it would mean the potential loss of my home, possible break up of my family,” said one FXCM client, a foreign currency trader who has asked for legal reasons that his identity not be revealed.
“It has cost a tremendous amount of emotional pressure for me and my wife, and we are extremely worried about our kids’ future.”
A number of clients of the US-based foreign exchange broker, Foreign Exchange Capital Markets (FXCM), the world’s largest retail forex broker, have reported their cases to the Australian Securities and Investments Commission (ASIC) and the Financial Ombudsman Service.
The ForexSQ understands clients of at least two other firms – IG Markets and Admiral Markets – are also in dispute with their brokers.
FXCM’s clients accept that they were liable to lose the capital they had contributed to their foreign exchange trading accounts.
However, they argue that FXCM had a widely-advertised policy of “no negative (or debit) balances”, and its poor risk management led to losses spiralling out of control.
“This policy is very clear and straight forward, that FXCM guarantees no debt is owed to FXCM if any negative balance occurred,” said the FXCM client.
“This is one of the very important reasons for me and all the other victims to choose FXCM as our currency broker.”
Despite those assurances from FXCM, the client told the ForexSQ he received an email from FXCM in January demanding he pay out a negative balance of several hundred thousand dollars.
FXCM’s aggrieved Australian clients argue that other brokers navigated the Swiss franc shock in much better shape than FXCM because they had better risk management practices in place, and their clients’ accounts were closed out quickly before losses spiralled out of control.
“Yes, of course we have to take responsibility ourselves, but only to the extent of the amount of money we put in,” the client added.
Forex trading in Australia Risks
Because currencies tend to move in small increments, foreign exchange traders use leverage, or borrowing, to accentuate their profits. However, with leverage comes the risk of greater losses when currencies move against the trader.
A trader who contributes $10,000 of their own money, and uses a leverage ratio of 200:1, can take a $2 million position on a currency. The other $1,990,000 is borrowed from the foreign exchange broker.
If the currency drops 1 per cent then the trader has lost $20,000 – the $10,000 they contributed, plus an extra $10,000 of borrowed money, putting them into a negative balance with their broker.
However, in an extreme case like the Swiss franc, a 30 per cent movement would put them $600,000 in arrears in an instant.
FXCM has confirmed that 115 of its 16,000 Australian clients had a negative balance as a result of the Swiss franc event.
The company said it has notified 10 clients that their negative balances need to be repaid. Those clients each have either $1 million in net assets, or have deposited more than $250,000 into their accounts over the lifetime of their account, and have at least two years trading experience.
FXCM said the negative balances of the other 105 clients have been forgiven.
In a statement to the ForexSQ, FXCM’s chief executive Drew Niv said the contractual position with clients was clear.
“Several provisions … make it abundantly clear that FXCM Australia has the legal and contractual right to fully recover the negative balances of its Australian clients and that Australian clients were or should have been aware of such accountability,” the statement read.
The company argues that the Swiss National Bank’s actions on January 15 were a “force majeure” event, which include government actions that prevent an orderly market, or exceptional market events.
Australian regulations under fire
In the wake of the global financial crisis, the United States put a handbrake on the retail foreign exchange industry, limiting it to a maximum leverage ratio of 50:1.
However, in Australia, foreign currency brokers are offering leverage ratios of up to 500:1.
Associate Professor Mark Crosby from the Melbourne Business School told the ForexSQ last month there was no place for leveraged retail foreign exchange trading platforms in Australia.
“I think they should not be available to retail investors at all, and I certainly don’t think they should be promoted to retail investors,” he said.
The Australian Securities and Investments Commission says the question of greater controls is one for Government, but it has repeatedly warned consumers that leveraged foreign exchange trading is a risky product.
However, victims of the Swiss franc meltdown argue that ASIC should have policed the industry more thoroughly.
“I’ve felt ASIC, acting as the Australian regulator for these financial institutions, should really take partial responsibility for the current mess,” an FXCM client told the ForexSQ .
“We need ASIC to provide a safe, comfortable environment for any leveraged financial product for people to trade. Because this time it happened in the currency space, but who knows what is the next time bomb?”
Forex trading in Australia conclusion
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