Last updated on January 30th, 2021 at 10:43 pm
IC Markets Australia reducing leverage to 30:1 from 29 March 2021 - What should I do?
Background
IC Markets sent clients an email on 7 Dec 2020 saying they will comply with ASIC’s new ruling for retail clients. IC Markets will:
- Reduce leverage to 30:1 on major pairs for Forex CFDs, 20:1 for minors, gold and major stock indices.
- Implement 50% margin close outs before all or most of the trader’s investment is lost.
- In IC Markets’ case, close out happens when net equity falls below 50% of initial margin – eg. initial margin required for $100,000 position assuming 30:1 leverage is $3,333. If net equity falls below $3,333/2 being $1666.67, IC markets can close out your trade automatically to prevent a further loss.
- Negative balance protection. You will not lose more than the amount in your account. (This, I feel is the best news for traders)
- Not give or offer certain benefits to retail clients (for example, offering trading credits and rebates or ‘free’ gifts like iPads) to open or fund an account or trade CFDs.
Why is ASIC doing this?
Simply put, to protect retail investors. They cite that during the volatile period of March and April 2020, retail traders lost more than $774 million and 15,000 retail accounts fell into negative balance position owing $10.9 million. By reducing leverage, the regulators are reducing the speed at which retail traders lose money.
This rule will remain in force for 18 months from 29 March 2021 until 29 September 2022, which may then be extended or made permanent.
While understandably this is frustrating for traders who use high leverage and know what they are doing, IC Markets has offered traders an option to switch to their seychelles entity to continue enjoying up to 500:1 leverage.
How to avoid the leverage reduction
To avoid the leverage reduction, please see if you qualify as a Professional client or switch to IC Markets’ Seychelles (global offering).
Pros and cons of switching to IC Markets global offering (Seychelles)
Pros
Higher leverage – Trade with less margin.
- Use the remaining capital that would have been used for margin to buy a bond or invest in a money market fund to earn interest of approximately 1-2% per year. In Singapore, there is the Singapore savings bond which currently pays around 0.89% on average over 10 years.
Cons
- Not be entitled to some of the protections afforded to retail clients under the Corporate Act 2001 (Cth).
- IC Markets is not required to provide a Product Disclosure Statement (PDS) or the Financial Services Guide (FSG).
- Forfeit the ability to recourse to the Australian Financial Complaints authority (AFCA)
What should I do?
If you trade with EAs that risk about 2% of your capital per trade (the recommended amount in the retail Forex industry) you should have no problem with the new leverage reduction.
- For eg, if you risk 2% of $10,000 capital, that is $200 of risk per trade. Assuming your stop loss is 10pips, and 1pip is worth $10, your trade size is $200/$100 of risk (being 10 pip) = 2 lots.
- 2 lots requires $200,000/30 = $6666 of initial margin, which you will definitely have considering your capital is $10,000.
Personally, remaining under ASIC regulation is more important for me as I am able to complain and seek recourse for any injustice I might face (although that has never happened).
Your decision will probably revolve around weighing whether higher leverage is more important, or having the ability to complain to ASIC.
The other benefit of higher leverage, apart from requiring less capital, is that you can use the capital you would have used to invest in a money market bond or savings bond to earn an extra 1-2% per year. This would boost your trading strategy’s annual returns.
- Eg. if your strategy returns 10% per year with 10% max drawdown, knowing that you only require at most 20% of your capital to cushion your drawdown in equity (since your max drawdown is 10%), you can invest the other 80% in a savings bond that returns 1% a year, so that your overall returns is now 10% + 0.8 *1% = 10.8% instead of 10% originally.
IC Markets 21% commission discount offer still valid
With regards to clients receiving a commission discount from IC Markets, as per our website’s offer here, you will continue to receive your commission discount regardless whether you are staying in IC Markets Australia or Seychelles.
If you are curious about how this commission discount works, check out – What are Forex Rebates?
I hope the above has helped your decision making to stay with IC Markets Australia or shift to IC Markets Seychelles.