The International Organization of Securities Commissions (IOSCO) is sounding the alarm about complex, leveraged over-the-counter (OTC) products being sold to retail investors.
IOSCO issued report on Wednesday that flags risks related to the marketing and sale of complex OTC leveraged products, such as rolling-spot forex contracts, contracts for difference (CFDs), and binary options, to retail investors.
The report, which is based on a survey of IOSCO members, indicates that regulators are concerned that retail investors may not be able to assess the risks associated with these products, or to withstand the losses that they may suffer in these products. Several studies have shown that, “a large majority of investors in these complex products lose money, giving rise to investor complaints,” IOSCO says in a statement.
Not only can the products perform poorly, but regulators also cited difficulties related to clients withdrawing their funds, and aggressive, or misleading, marketing and sales practices.
IOSCO members are also particularly concerned by the cross-border offering of these sorts of products, noting that these, “cross-border promotional campaigns are often aggressive and/or misleading in some jurisdictions.” Another cross-border concern is jurisdictions that ban the sale of these products to domestic investors but don’t take regulatory action if the investors are foreign.
Regulators often struggle to track unlicensed foreign firms that may provide false addresses or use anonymous domain registrations for their websites. “The survey results indicate that many unlicensed firms are scams,” IOSCO says.
Feedback sought on incentives for order routing
Separately, IOSCO on Wednesday published a consultation paper on the practice of paying for order flow, and the use of other sorts of order routing incentives, and how regulators around the world are addressing these issues.
The paper provides an overview of the practices used by regulators to oversee the incentives for order routing, and the conflicts this creates.
The consultation paper examines the regulatory conduct requirements for brokers or firms to manage conflicts of interest associated with routing orders and obtaining best execution. It also assesses how these requirements interact with market practices in different jurisdictions to affect order routing incentives, and how these incentives influence the behaviour of brokers towards their clients.
The paper is based on a survey of regulators and their efforts to address these sorts of incentives, which includes compensation paid between brokers and third parties, order internalization practices, and the provision of goods and services that are bundled with execution services, such as broker research.
The paper does not propose the immediate adoption of any reforms in this area, but it does call on firms to consider the findings of the report. It also seeks feedback on whether IOSCO should undertake any further work in this area.
Comments on the paper are due by Feb. 21, 2017.
Photo copyright: polygraphus/123RF