ASIC warns against CFDs as collapsed broker Sonray found to hold $65 million in client accounts

The Australian Securities and Investments Commission has issued a warning against investors using CFDs (contracts for difference), the controversial trading instruments suspected to be behind the collapse of brokerage firm Sonray Capital Markets.

The company, which collapsed yesterday, has over $65 million frozen in over 3,000 accounts, the administrators say. A creditors’ meeting is set for next Friday.

Yesterday, ASIC chairman Tony D’Aloisio told the Parliamentary Joint Committee on Corporations and Financial Services that ASIC will soon release guidelines for investors regarding risky trading instruments – particularly CFDs.

CFDs are a type of trading tool that allow investors to place bets on various outcomes. For example, whether a particular share will rise or fall, or on the performance of a particular sharemarket.

D’Aloisio said that although it cannot hope to educate everyone, “or even the majority”, about the complexities of CFD trading, said “there are some very basic messages that we can get across”.

“I think we could get across basic messages: if you don’t understand it, don’t buy it. And the importance of understanding what you are investing in.”

The comments come after D’Aloisio told the same committee in April that these products were riskier than gambling, and said, “I don’t think we’ve seen at this stage any real horror stories emanating from that market but we need to be careful”.

While CFDs are banned for some investors overseas, in Australia there are currently limited regulations for trading and the market is reportedly worth over $350 million. However, deputy commissioner Belinda Gibson also told the committee the watchdog is questioning some traders.

“We are having a dialogue with the CFD providers where they effectively provided derivatives on a listed security to see whether there is insider trading happening on the CFD market.”

“The focus on derivatives more broadly then goes to some of our retail issues and our investor protection issues, that comes to looking at the quality of disclosure.”

The warnings come as administrator Ferrier Hodgson continues to investigate the collapse of brokerage firm Sonray Capital Markets, which specialised in CFD trading.

Partners George Georges and John Lindholm have just launched a primary investigation, but already say about $65 million is already frozen in 3,085 client accounts. In a statement today, Georges said the firm will ensure those accounts remain frozen.

Additionally, he said that due to the complex nature of Sonray’s business, it could take some time to finalise a report as to why the company collapsed. It is understood Sonray used a variety of different accounts to hold clients’ funds.

 “There has been a great deal of interest in the Sonray assets – particularly the well-developed wholesale trading platform, which had been due to go live in August, and the client database,” he said. “We are speaking to a number of parties about the potential purchase of those assets.”

The first creditors meeting is set for next Friday, July 2. Information will be sent to the creditors soon, Georges said, explaining what is going on and how the investigation will affect their funds.