The Australian Securities and Investments Commission has called on participants in the retail over-the-counter derivatives sector to improve their practices after recent revelations of poor conduct.

The products offered by retail OTC derivatives issuers to HNW investors in Australia include binary options, margin foreign exchange and contracts for difference.

A recent review of 57 retail derivative issuers identified a number of risks associated with the products.

ASIC's review suggested that retail customers had lost excessive amounts of money in OTC derivative trades, with the percentage of unprofitable traders being up to 80% for binary options, 72% for CFD traders and 63% for Margin FX traders. ASIC will examine further.

ASIC's recent supervisory activities have also revealed sector-wide concerns about certain practices, the most worrying of which include:

• actual clients' profits being inconsistent with marketing materials;
• not enough disclosure of information to customers about pricing;
• risk management practices that relied on the use of client money been outdated and in need of review;
• some referral arrangements that might have broken ASIC's conflicted remuneration requirements and referral selling prohibitions;
• some issuers that were providing wholesale services or allowing third parties to ‘white-label’ their products not managing risks systematically and adequately and not having 'operational capital' to supervise counterparties and support their exposures.

ASIC is calling on issuers to:

• review and update their risk management and client money practices; and
• find out whether their arrangements with counterparties and referrers meet their regulatory obligations.

The retail OTC derivatives sector in Australia is an active and growing market, with an annual turnover of A$11 trillion (US$8.13 trillion) and more than 450,000 investors.