A DECISION by Switzerland to finally give up its three-year fight to defend its currency not only sent shockwaves through some of the world’s biggest investment banks, it exposed a gnawing vulnerability in one of the fastest-growing corners of Australia’s investment markets.
Many of Australia’s 51,000 retail foreign exchange investors may not realise how close they came to being wiped out by moves in a currency they never bet on.
Australia is one of the few places in the world — along with Cyprus and Mauritius — where brokers can use client funds on deposit as collateral for potential losses incurred by the firm on other currency bets. It’s a quirk in Australia’s corporations law that’s been exploited by brokers in a flourishing retail foreign exchange and contract-for-difference industry. It has allowed mostly online brokers to boost their growth without having to risk much of their own capital.
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