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"ASIC Is Monitoring the Rise of Prop Firms"

Dr. Rhys Bollen, Senior Executive Leader of Digital Assets and Markets at the Australian Securities and Investments Commission (ASIC), confirms: "ASIC is monitoring the rise of 'prop trading' firms or services related to CFD trading."

Finance Magnates spoke with Dr. Bollen, who will participate in the "Trading Landscape in APAC and Beyond" panel at the Finance Magnates Pacific Summit on August 27.

"One area of future focus for ASIC is the distribution of CFDs through emerging channels such as 'prop trading' services. In 2024/25, we plan to conduct detailed monitoring of emerging distribution methods in the CFD industry and review consumer outcomes."

ASIC's confirmation becomes the latest regulatory commentary on prop trading. Recently, Dr. George Theocharides, Chairman of the Cyprus Securities and Exchange Commission (CySEC), also confirmed that there will "definitely be more scrutiny of prop firms in the near future."

About a month ago, Finance Magnates reported that the European Securities and Markets Authority (ESMA) conducted a preliminary examination of prop firms and discussed potential regulation of the industry. A week later, we published the first EU regulatory comments on the industry: Czech regulator claims prop firms "may be bound by MiFID".

Now, the ASIC executive's confirmation indicates that an increasing number of regulators are attempting to understand the prop trading industry. However, prop trading is not the only area of ASIC's focus.

"Protecting Retail Investors from High-Risk Products"

Dr. Bollen adds: "Technological and automation developments, along with increased retail investor participation, have significantly driven changes in the trading industry, leading to new threats and harms in our regulatory environment. This is reflected in our strategic priorities over the years, with increased focus on cybersecurity, technological and operational resilience, AI, machine learning, electronic trading, and crypto assets."

"These will continue to be areas of focus for ASIC as technology evolves. We emphasize the importance of strong governance and risk management," Dr. Bollen asserts.

He assures that ASIC will also continue taking action to protect retail investors from high-risk products and business practices that may be unfair, inappropriate, or lead to poor outcomes.

ASIC Has Shut Down Nearly 3,500 Scam Websites

Dr. Bollen also emphasizes that compliance with market integrity rules and Design and Distribution Obligations (DDO) requirements "will continue to be a focus."

ASIC implemented DDO rules in October 2021 and has strictly enforced these obligations for financial services firms. It requires financial service providers to ensure products are designed with consumer needs in mind and distributed in a targeted manner. They must also monitor outcomes and reassess their product governance arrangements over time.

The regulator has taken DDO violation actions against several financial services firms, including well-known brands like Saxo and Mitrade. It even sued retail broker eToro for DDO rule violations, a case currently before the Federal Court.

"We Continue to See Consolidation of Traditional Brokers"

"ASIC is facilitating compliance with requirements, deterring poor practices, and taking strong action to enforce the law and protect consumers where appropriate," says Dr. Bollen.

He points out the challenges facing regulators: "Technological change has fundamentally altered the trading industry" and adds that "among other impacts, it has made trading and information more accessible, increasing competition, market fragmentation, and speed."

He notes that "we continue to see consolidation of traditional brokers and proliferation of online trading providers."

"Exploring Potential Uses of Artificial Intelligence"

Another area of regulatory concern is the "rapid change and expansion" of artificial intelligence (AI).

As Dr. Bollen acknowledges, "We expect it will continue to drive efficiencies in risk management and operations, such as price prediction, hedging, and fraud detection." He adds that "recent developments, particularly generative AI, may create new and different risks and issues."

According to Dr. Bollen, this also means that market misconduct threats are evolving and becoming increasingly sophisticated, requiring enhanced surveillance and enforcement capabilities to stay ahead. This includes investing in data and technology to help combat innovative forms of market misconduct, "protecting market integrity remains a long-term focus for ASIC," he affirms.

Dr. Bollen further confirms that ASIC will continue exploring potential uses of AI and other technologies to better understand how they are being applied and the risks and opportunities they present. He claims: "All participants in the financial system, including regulators, have a responsibility to balance innovation with responsible and ethical use of emerging technologies."

Australia is considered one of the mature markets for retail trading, and over the years, ASIC has changed retail trading rules to protect investors' interests. Among various investment instruments, cryptocurrencies have also made their mark among Australian investors.

"Crypto Asset Issuers Need Australian Financial Services License"

When asked whether Australia needs a MiCA-like regulatory framework, Dr. Bollen states that "many crypto asset products are financial products under existing law."

He explains that issuers, as well as any intermediaries and exchanges trading these crypto assets, require an Australian Financial Services License.

He clarifies: "We are seeking to provide additional guidance where possible, including through court proceedings to clarify the application of existing laws."

Dr. Bollen also notes that the Australian government has proposed implementing a licensing regime for digital asset facilities that provide custody and trading services for crypto assets. This would include all digital assets, not just those that are financial products under existing law. The government has also proposed updating the payment services regulatory regime to include certain stablecoins. "These reforms will ensure Australia regulates all major forms of crypto asset activity."

"ASIC Receives New Rule-Making Powers"

Regarding regulation in Australia, ASIC oversees the country's broader financial services market. As such, it holds significant power and authority over the financial services industry. The Australian government is providing the regulator with more powers to better control the market.

Dr. Bollen notes: "Our market infrastructure powers, particularly clearing and settlement (CS) facilities, are undergoing significant developments, including Financial Market Infrastructure (FMI) and Clearing and Settlement Competition (CiCS) reforms."

He further explains that under the CiCS reforms passed by Parliament last September, ASIC received new rule-making powers for clearing and settlement services. These powers take effect for cash equity services in May 2024. "Our new powers are designed to promote competitive outcomes where competition exists and is absent," he states, "ASIC plans to consult on draft CS rules for cash equities in July to achieve these outcomes."

Dr. Bollen assures that ASIC closely monitors other changes in financial markets. It is observing the recent decline in the number of Australian listed companies and the shift to private markets. He asserts that ASIC is responding by expanding its focus on capital market structural changes. "This includes reviewing other products and markets when we conduct our market cleanliness work and further considering how companies manage inside information. ASIC is committed to ensuring Australian markets remain clean and transparent."

Reference:Exclusive: “ASIC Is Monitoring the Emergence of Prop Trading Firms”