Interactive Brokers, a US-based online brokerage, can no longer offer margin to its Australian clients. According to Australia's financial markets regulator, ASIC, Interactive Brokers did not have the proper broker's license to extend margin loans to its traders.
Interactive Brokers has been operating in Australia for more than 13 years. Its financial services license permits it to deal in securities, derivatives and foreign exchange contracts. But the Australian Securities and Investments Commission has stopped the firm issuing new margin loans to Australian clients after it discovered the firm was dealing without a license.
According to David Friedland, Asia Pacific managing director, Interactive Brokers, ASIC approached the company several weeks ago but no decision had been made until last weekend. IB has now informed its account holders of the ASIC decision.
Margin Risk
A margin loan is a tool that lets people borrow money to invest and uses their shares or managed funds as security. Margin is basically an act of extending credit for the purposes of trading. For example, if a trader trades on a 50 to 1 margin, then for every $1 in his account, he is able to trade $5.
The advantage of trading on margin is that a trader can make a high percentage of gains compared to the actual amount of money in the trading account. The disadvantage of using margin is its risk. A trader can lose more than he or she started out with and find himself unable to pay back this debt.
When the rule regarding margin loans was changed in 2010, issuers and advisers of margin lending facilities were asked to apply for an Australian Financial Services license, or a variation to an existing license. They had from February 1, 2010, until June 30, 2010, to do so. Industry participants who failed to do so were warned that they would have to stop providing such services.