The wild-west-like days for Binary Options and CFD’s could be seriously numbered in Australia.

The eye of ASIC is now glaring at these investment products that have seemingly gone under the radar as compared to other derivatives.

The regulatory body has proposed both a ban on the sale of Binary Options (to retail clients), and a restraint on the sale of CFD’s.

Why the crackdown?

Binary Options only have two possible outcomes; win or lose. Hence the name ‘Binary’. They are not a standardised product and are therefore not usually traded via an exchange. They also have an incredibly risky maturity horizon, generally expiring at some point on the same day as when it was purchased. This greatly increases their level of risk for the investor, regular Options (ASX Exchange Traded Options) instead expire on a weekly basis, up to 4 years away in time.

CFD’s are a popular product in Australia, perhaps due to the level of promotion and ease-of-access from companies such as Plus500 and IG Markets. The key risk is the amount of leverage involved – which can sometimes be up to 500 times the amount of funds you outlay. ASIC is concerned that clients discover too late that their liability can greatly exceed the funds that were initially deposited.

The other key risk for CFD’s is that both your trade and your funds sit on the business’s balance sheet. This means if the company goes under (which is not as rare as you might think), there’s a good chance you will never get your money back, with your funds covering other peoples’ losses.

If you are a proponent of these products, you may be finding yourself saying “Hey ASIC, just leave us alone, we know what we’re doing!” But it’s not just ASIC that has this view on such products. In the U.S., Binary Options are already unavailable to retail investors, and CFD’s are outright banned.

If you like the idea of leveraged trading but are looking for a better alternative, ASX Exchange Traded Options (ETO’s) and MINI Warrants are both traded on the regulated ASX Exchange.ASX.