When two men in their 20s were recently charged in possibly Australia's biggest insider trading case, the headlines were all about the A$7 million ($7.45 million) score.

One of the accused men, a 26-year-old, used his newfound wealth to spend A$2.4 million on the Melbourne apartment designed by twins Alisa and Lysandra Fraser in TV's The Block.

Less was said about the tens of millions of dollars in retail investors' funds put at risk by the trader's big bets on the Australian dollar.

Industry insiders say the contracts for difference and foreign exchange (CFD/FX) providers used in the trading scandal took on bets with a value well beyond A$500 million and beyond their entire asset value.


If the dollar had moved the wrong way despite the inside information and the 26-year-old trader could not have stumped up the cash, the CFD/FX providers would have been liable and collapsed, losing all of their clients' money.

Australia is one of just two countries in the world — along with Cyprus — that allows providers to use client funds for daily operational needs and does not force them to fully segregate it.

The issue has divided an arguably under-regulated industry that has existed in Australia only since 2002.

CFDs — which are highly leveraged bets on price movements in shares, FX and other assets — are regarded as exotic and high-risk derivatives only the most experienced investors should use.

Yet the estimated 91,000 and growing FX/CFD retail investors are retail clients including many mums and dads, who believe their money is safe in client-segregated accounts and not supporting the business.

US-based MF Global was Australia's number three CFD provider when it collapsed in 2011.

They used 11,000 Australian clients' funds to cover shortfalls, stranding those traders' savings when they collapsed.

Last September, Australian CFD/FX firm GTL Trade-up collapsed owing clients A$4.4 million. Its director Mahmood Riaz sent A$4.4 million in client money legally to a related entity in Dubai and those Australian and New Zealand clients are still owed their money.

"There's a lot of firms that operate in Australia and part of the reason why there are so many of them is because the barriers to entry are extremely low," says IG's Asia Pacific Tamas Szabo.

Australia's biggest industry players IG and CMC Markets set up the Australian CFD Forum in 2012 stating that they did not use client funds and calling on Treasury to ban a loophole.

Finance Minister Mathias Cormann said he was considering the issue.

The forum's concerns are not altruistic - small firms getting into financial difficulty, collapsing and losing client money will kill trust in potential new investors in CFDs, which is bad for business.

The corporate regulator ASIC's chairman Greg Medcraft has been concerned enough since MF's collapse to go a step further and all but warn people off CFDs.

He called them more risky than gambling because people could owe more than their initial outlay.

Many who did trade them should not be, most did not understand the risks and did not know if their client money was pooled and at risk.

ASIC also cited the way that some CFD providers are slickly marketed to new and inexperienced mum and dad traders without explaining the risks.

CFD's defenders say they play an important role as a hedge, for price discovery and adding to liquidity.

The companies that want to use client funds accuse the CFD forum of an anti-competitive push by bigger and more powerful foreign firms.

The competition regulator the ACCC has authorised the forum.

Those companies say they need to use client funds to compete and as collateral, and a hedge against their clients' trades.

Banning it would kill their business model and industry competition, they argue.

Using client money is far cheaper for firms who pay no funding costs, which they would if they were using their own borrowed cash.

"It is quite amazing the size of trades quoted and exposure firms are taking," said one market source, in relation to the scandal.

"The worst case scenario is that we have another MF Global on our hands, where a lot of people lost a lot of money."