Moves by the Federal Government to impose laws that curtail brokers’ use of client funds to hedge against financial risk have met with opposition by a lobby group.
The newly formed CFD and Margin FX Association, which is an alliance of domestic and international derivatives providers, said the Government’s move to ban hedging as part of reforms to the Corporations Act would severely damage investors and financial trading firms.
It further argued that the Government was adopting a regulatory regime that was similar to the UK, which left mum and dad investors worse off when a major trading firm crumbled.
The reforms come in the wake of collapses of two major global financial trading houses, MF Global and BBY.
Director of the lobby group, Matt Murphie, argued the Government should compare the effectiveness of client protection in the UK and Australia.
“In the UK, MF Global operated under the unhedged model, while the Australian firm used the hedged model,” Murphie said.
“In the UK, the distribution payment to clients was short 10 cents in the dollar, while in Australia the distribution was short only 1 cent. Investors in Australia were clearly better off here so why are we using this collapse as a reason to move to UK regulation?
He argued that the reforms would give mum and dad investors a false sense of security that they have boosted protection, and said the changes favour a few large multinational companies that run large amounts of risk, and see reforms as a way of reducing competition.
Murphie also urged the Government to consult the industry before implementing the forms.
“While the Treasury’s draft policy makes good progress in better protection of client money, eliminating hedging may inadvertently increase financial risk in the sector and leave customer’s vulnerable to losing money,” Murphie said.
