Contracts for Difference and CFD Trading

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UK: London Brokers Raise Margins to Cover CFDs

Several of London's stockbrokers have followed MF Global Ltd.'s decision to demand more money from its clients to cover derivative positions, the Daily Telegraph newspaper reported.

Finspreads, City Index, IG Index and Saxo Bank have told clients that they will increase the ``margin'' needed to cover Contracts for Difference, or CFDs, on banks and other stocks, the London-based newspaper reported.

Saxo Bank A/S increased margins on all stocks to 50 percent, the Telegraph said. Both City Index and IG Index raised the margin on bank stocks to up to 10 percent, the Telegraph said. An unidentified IG Index spokesman said the group would review its margin requirements in the next few weeks, according to the newspaper.

USA: MF Global sees liquidity; ups some margins

MF Global, a futures broker whose shares plummeted earlier this week on liquidity worries, recovered a bit on Wednesday after saying it has "close to $1.4 billion" in available liquidity.

MF Global, which bills itself as the world's largest broker of exchange traded futures and options, also said it had raised margin requirements for clients in its equities derivatives business "as a result of continued market volatility and dislocations.".

"Rumors regarding (our) liquidity position are without merit," the New York-based company said in a statement. "MF Global retains close to $1.4 billion in unused committed liquidity facilities, which have not been drawn on in the last two weeks." It did not give details on the facilities.

MF Global shares closed up $1.19, or 14.6 percent, to $9.36 on the New York Stock Exchange.

On Monday the shares fell 62 percent to $6.05 and touched a low of $3.88, their worst level since MF Global was spun off from Man Group last July.

The company said it had raised margin requirements on its European equities "contracts for difference," or CFDs. The contracts are between two parties to exchange the difference between the opening and closing prices of a security over a set period of time.

"The margin requirements being raised were specific to the equities derivatives business. That's basically our CFD business in the UK. It does not apply at all to any other futures and options," MF Global spokeswoman Diana DeSocio said on Wednesday.

MF Global offers CFDs to clients in Britain, France, Germany, Italy, Singapore and Australia, according to the company's Web site.

Man Group holds an 18.6 percent interest in MF Global.

Ireland: New product limits the dangers for smaller investors in CFD market

CMC Markets, a UK financial derivatives provider, is set to enter the Irish contracts for difference (CFD) market, offering a new product aimed at saving customers from the bloodbath experienced by investors in these instruments when the markets turned sour last year.

CFDs typically allow investors take leveraged positions in a company, with as little as 10pc of the price of stock required as an initial outlay. Investors can also use CFDs to gain exposure to stock market indices, commodities and foreign exchange rates and bet on prices moving either up or down.

They were a particular favourite among Irish high-rollers playing the rising stock market in recent years. But the love affair ended abruptly last year as the Dublin market slid 26pc, forcing investors to put up more cash to cover their losses.

"It's fair to say a lot of people got burnt. But why did this happen? Is there something fundamentally wrong with the product? We think it came down to a lack of education and understanding among users of how leverage can work for and against you," said Declan Bourke, country manager for CMC Markets in Ireland.

"It's a good product. But so is a 5-series BMW -- you don't just give that to someone who hasn't learnt to drive the keys and tell them to fire ahead."

CMC Markets, which is launching in Dublin next Thursday, will hold weekly seminars and one-on-one training sessions for existing and potential clients, he said.

Mr Bourke said the company's target market is small investors who would not have been the target of private client divisions of Dublin stockbrokers.

The firm's flagship CFD product is a so-called "fixed risk account". Unlike traditional products available in the market, it limits possible losses to the funds a client has in his account. Minimum fund requirements can be as low as 10pc of the cost of a frequently traded stock, such as the Irish banks, but rising to 40pc for a stock that changes hands less often.

"By managing risk appropriately, these products aren't just for a niche audience but allow any investor to participate efficiently in a wide range of financial markets," said Mr Bourke.

The firm gives investors access to over 3,000 different instruments, including equities, commodities, government bonds and foreign exchange -- traded on 20 financial markets globally.

UK: CFDs come in for closer scrutiny

New rules may soon force holders of contracts for difference (CFDs) to reveal their hand. In proposals unveiled on Monday (12 September) the Financial Services Authority (FSA) says it may force disclosure of positions greater than 3%.

Private investors are often faced with inexplicable share price movements. These have been blamed on unofficial leaks of hidden CFD positions. Stockbrokers have called for a mirror of the rules for disclosing share positions so everyone is on a level playing field.

The FSA had initially said it would not introduce a disclosure regime for CFD positions. However, the watchdog later changed its position saying it would reexamine the case and this week’s consultation paper is a result of that investigation. Holders of CFDs can use the instruments to acquire shares by stealth. A bidder, for instance, can effectively build up a position undetected by having an agreement with the CFD broker to purchase shares they own in relation to a contract.

When an investor takes out a CFD the broker may buy a corresponding amount of shares in the market as a hedge. Once the contract expires the broker may give the investor the option to acquire these hedge shares.

Alternatively, there may be an agreement between the investor and broker as to how to exercise the voting rights of the hedging shares. The FSA proposes holders of more than 3% would only have to disclose if they have such control over the underlying shares.

There is a second proposal to ensure disclosure of all CFD positions above 5%. This would be similar to the current major shareholder regime for shares, although the FSA says it will be a lot more expensive to implement.

Ireland: Investors face tough CFD crackdown

Investors will be prevented from using contracts for difference (CFDs) from next month unless they satisfy strict new rules aimed at counteracting mis-selling of the high-risk stock market instruments.

The crackdown will force brokers that offer CFDs - highly-leveraged bets that allow investors to profit from movements in a share price without owning the underlying share - to conduct detailed investigations into individual clients, to find out whether they fully understand the risky nature of the products and the extent of the potential losses to which they are exposed.

A number of CFD investors suffered multi-million euro losses in August, when the share prices of companies to which they were exposed suffered sharp falls of as much as 10 per cent in the space of 24 hours.

Some of the investors who had failed to react to the falls quickly and adjust their trading strategies were forced to liquidate their positions and sell out before prices rebounded.

From next month, however, brokers will be obliged to refuse to carry out client instructions if they fail to satisfy themselves that the client is equipped to deal in CFDs or if they feel the client has insufficient resources to suffer losses.

They will also be obliged to warn investors not to proceed with a transaction if they feel investing in CFDs is not appropriate to their circumstances.

Clients, meanwhile, will be required to provide brokers with information detailing their financial position and evidence of their investment track record before dealing in CFDs.

This contrasts sharply with existing practice in some firms, which only required clients to sign a disclaimer before commencing trading.

CFD trading was widely considered to be a specialised niche activity until recently. Investor interest in the instruments surged on the back of a steady rise in the Iseq index, however, as they allowed investors to make substantial profits without the need to put up large amounts of cash up front.

Confidential briefing documents seen by The Sunday Business Post disclosed that the Irish Stock Exchange estimated that CFD trading accounted for up to 50 per cent of all its share trading activity.

PSE eyes equity derivatives for OFW market

The Philippine Stock Exchange (PSE) is studying the feasibility of introducing equity derivatives or contracts for difference (CFDs) to tap into the vast market of Filipino overseas workers in line with efforts to further spur the growth of the capital market.

In a forum sponsored by the PSE Thursday, bourse president Francis Lim said he is hopeful that with the CFDs, the exchange can attract overseas-based Filipino investments.

With the assistance of MF Global Ltd., OFWs who are keen on investing in companies listed on the exchange will be given access to do so free of the difficulties often associated with investing outside of their own market.

MF Global Ltd., the leading broker of exchange-listed futures and options in the world, operates in 12 countries on more than 70 exchanges with an asset base of $4 billion and clients totalling 1.5 million.

Lim, however, said he has yet to take this matter up to the other members of the PSE board.

“This is relatively a new concept. It is something that needs to be studied. I think it’s doable. Philippine stocks will not only be made available to OFWs but to foreign investors as well,” he said.

CFDs were created in 1991 as an institutional trading and hedging instrument. CFDs are currently available in listed and/or over-the-counter markets in the United Kingdom, Germany, Switzerland, Italy, Singapore, South Africa, Australia, Canada, New Zealand and most recently Sweden. Some other securities markets, such as Hong Kong, have plans to issue CFDs in the near future. CFDs are not permitted in the United States, due to restrictions by the US Securities and Exchange Commission on OTC financial instruments.

OFWs remitted an estimated $13 billion last year, providing critical support to the economy. This does not include cash sent home through informal, non-bank channels.

According to estimates of the central bank, overseas Filipinos are expected to send back $14.7 billion in remittances this year.

“If we could only tap a portion of this into the stock market, then that would be a further boost to our capital market,” Lim said.

Trading In Catastrophic Events

Climate Exchange Plc And Deutsche Bank To launch Trading In Catastrophe Event-Linked Futures On The CCFE

Insurance Futures Exchange Services Ltd (IFEX), a member of the Climate Exchange Plc group of companies, and Deutsche Bank AG today announces the planned launch of trading in catastrophe event-linked futures (“ELF”) on the Chicago Climate Futures Exchange (CCFE) later this month, pending CCFE’s self-certification of the futures product with the U.S. Commodities Trading Commission.

ELF contracts are standardized exchange-traded futures derivatives contracts, also know as “contracts for difference”, providing a binary payment based on natural catastrophe events which result in industry-wide insured losses, similar to the Industry Loss Warranty (ILW) features found in some insurance agreements. ELF contracts will offer investors the ability to trade natural catastrophe loss risk outside the framework of conventional insurance and reinsurance contracts, as well as provide hedging contracting capability for property/catastrophe insurance-linked exposure.

“Deutsche Bank has been a market leader in developing a liquid trading regime for exposures linked to property and casualty insurance though its over-the-counter Event Loss Swap contracts,” said Elad Shraga, Managing Director in Deutsche Bank’s Global Principal Finance group. “Deutsche Bank is excited to work with visionaries of the caliber of Richard Sandor and Climate Exchange, and continue the evolution of trading opportunities for this asset class.”

Richard Sandor, Chairman of Climate Exchange Plc, said: “We are delighted to announce the launch of IFEX and our joint venture with Deutsche Bank which will ensure the continuing convergence of insurance and capital markets.”

Heated points of difference - Australia

FULLY FRANK: The battle lines are being drawn for a memorable stoush over contracts for difference trading.

In one corner are the established CFD traders, who have literally carved out the retail over-the-counter market over the past five years.

And in the other corner is the Australian Securities Exchange, which is gearing up to start market trading of the popular leveraged instruments in the next couple of months.

Judging by comments from the established players, they won't be saying goodbye to their customers willingly.

David Trew, managing director of the largest Australian CFD trader CMC Markets, said he didn't think the ASX trade would put a dent in their turnover.

"CFD trading is our core business and we know how to offer a product that is attractive to the end user," said David.

"From what I have seen of what the ASX is offering, it will not have a lot of appeal for the existing CFD trader."

David said CMC and other providers had 24-hour trading, stop-losses and more than 2300 products to trade on.

In contrast, the ASX CFD market will only have 66 products trading at the same time as physical markets.

David claimed the ASX had a poor track record at launching new trading products such as listed options, warrants and currencies and he doubted their technology would match that of the established providers.

"There have been attempts to offer listed CFDs in other international markets and they have all failed due to a lack of liquidity," said David.

"They say there is more transparency in their trades, but since they took away broker codes I don't think that's the case."

While not wanting to respond directly to David's complaints, ASX general manager of new markets, Ken Chapman, said there had been tremendous public and broker interest in listed CFDs.

"We have already had more than 1000 people in Melbourne confirming they will come to our free seminar next Tuesday, so I think it will be a really successful product," said Ken.

"The three big things we will be offering are transparency, independence and investor protection."

Ken said it was a deliberate decision to offer ASX CFDs only on stocks with deep liquidity because that is what investors are interested in.

"We think it is a really nice product that will bridge the gap between the share market and the sophisticated traders on the futures market."

With many large brokers committed to ASX CFDs and an online education package with a trading simulator pending, Ken said he was confident the ASX product would succeed.

"The big advantage we have is that we are trading on a market, so you will be able to see turnover and all of the normal trading figures.

"And we have a strict order of preference -- if your order is ahead of a big merchant bank it will be filled before them."

CFD rules set for major overhaul - Ireland

Investors who build up stakes in companies using contracts for difference (CFDs) will be forced to disclose their shareholding when current rules on the financial instrument are overhauled in the coming months.

The Sunday Business Post understands that the Takeover Panel will shortly tackle the loophole which allows stake-builders to remain anonymous by using CFDs.

The ability to avoid disclosure through the use of CFDs came to prominence recently, when property developer Liam Carroll built up a stake in ferry operator Irish Continental Group (ICG) by using the instruments.

Carroll’s identity was suspected for several weeks but only recently confirmed. Insurance and cement billionaire Sean Quinn has also been reported as having built up a stake of around 5 per cent in Anglo Irish Bank.

Quinn has yet to declare publicly the level of his interest in the bank despite recent market rumours that he may have increased his interest.

A similar loophole was closed off in Britain last year, following the role played by CFDs in a number of high-profile takeover bids, including an attempt by billionaire retailer Philip Green to launch a bid for Marks & Spencer.

The new British rules are seen as having improved transparency, and an overhaul of the Irish rules is expected to mirror those in Britain.

Sources familiar with takeover regulations said they expected disclosure rules to be changed as early as this year, with more complex changes impacting on CFDs likely to be introduced in 2008.

‘‘The disclosure issue is easy to address and that can be done very quickly,” said the source.

‘‘You may see changes to the disclosure regime coming in this year, depending on whether it is decided that it is of such significance that it needs to be done immediately or whether it can wait to come in with other changes to the treatment of CFDs.

‘‘The second is a more complex issue, which is how you treat the individual who holds the CFDs for the purposes of control.”

Technically, a person who enters into a CFD does not own the underlying shares and does not hold the voting rights to the stock.

The Takeover Panel would need to consider a range of financial derivatives and establish when a share is judged as being in control of the investor.

The panel regularly updates its rules to keep up with market developments and has recently completed integrating an EU takeover directive in to Irish legislation.

The body would be expected to hold a consultation process before any changes are made to the existing rules.

Irish market to be hit hard following CFD losses - Ireland

The Irish stock market is set to suffer significant fall-out from last week’s dramatic drops.

Many wealthy investors in contracts for difference (CFD) products, and in specialist investment funds with a heavy exposure to the Irish market, are understood to have incurred significant losses.

CFD holders, whose business accounts for up to 50 per cent of trading volumes on the Irish Stock Exchange, were among the heaviest losers in last week’s share decline.

Now it has been learned that they have also had their buying power severely curtailed after a move by Cantor Fitzgerald, the US investment bank that provides the bulk of CFD products to clients of Dublin brokers, to protect itself from losses caused by falling share prices.

This will severely curtail their trading levels in the market, cutting the overall level of activity in the market and the income of stockbroking firms.

CFDs, which have also attracted business from wealthy investors, allow them to gain exposure to individual stocks without physically buying the shares in question. They have attracted large commission fees for local broking firms and are considered one of their most lucrative sources of income from high net worth clients.

They also generate spin-off fees - the Irish Stock Exchange estimates that CFDs drive between 30 per cent and 50 per cent of its total share trading volumes.

Cantor changed its policy governing margin payments from CFD clients last week, doubling the amount of upfront cash they must put up to trade in CFDs.

The move will mean that CFD traders who put €10,000 in their trading account will, from now on, only be able to have exposure to shares worth €50,000, down from €100,000 under the previous policy.

CFD traders also suffered heavily during last week’s market sell-off, which knocked 10 per cent off the main financial stocks in Dublin between Thursday and Friday.

The highly leveraged nature of the instruments meant that a 10 per cent fall in an individual stock would have been enough to wipe out all the money put up by a typical CFD investor to enter into a contract.

Some brokers said clients who had enjoyed lengthy success in CFD investing had continued to roll up their investments into fresh CFDs, instead of taking their gains in cash.

Last week’s falls brought previously successful trading strategies to an abrupt end, they said.

FSA says derivatives transparency hard to enforce

LONDON (Reuters) - The Financial Services Authority faced fresh calls on Thursday to adjust rules on derivative positions used by investors to build stakes, but the watchdog said increased transparency could be hard to implement.

The admission came as the Association of British Insurers added its voice to the debate around contracts-for-difference (CFDs) on Thursday, saying it wanted greater disclosure.

Echoing other trade groups, the ABI said CFDs make ownership difficult to track, potentially harminging investors.

CFDs are special derivative instruments that allow a person or company to have exposure to a firm's shares without physically owning them. The concern is that a hedge fund, for example, could build up a large stake in a company through CFDs without it immediately coming to light in the market.

The Financial Services Authority (FSA) is currently consulting on CFDs -- after an initial analysis failed to yield a consensus -- but Hector Sants, the incoming FSA head, said it could be difficult to shift from a regime of ownership disclosure based on voting rights to one based on economic interest.

"It is an easy statement to make, but very difficult to implement," Sants told reporters after the FSA's annual meeting, his last as head of the regulator's wholesale and institutional markets unit before taking over as chief executive on Friday.

He said any change -- unlikely now before 2008 -- would have to pass a cost-benefit analysis and be practicable.

The Takeover Panel already requires CFDs to be disclosed during offer periods.

"It is not immediately obvious to us that this is scaleable," Sants said.

Nedbank rattles CFD cages

Johannesburg - The booming (and profitable) market for contracts for difference (CFD) will experience some competition with Nedbank Capital's entry. Over the past few years CFDs have become very popular among South Africans because of the gearing and cost advantages they offer over conventional share trading. They are also deemed to be much easier to understand than other derivatives such as single-stock futures or warrants.

Currently, smaller companies such as Global Trader, Dealstream, Ideal CFDs and PSG dominate the CFD market. Nedbank's entrance is bound to shake up the market, to the benefit of the consumer.

The bank's name is bound to be its major selling point. CFDs are an unregulated industry and many punters are unwilling to hand their money over to a company they are unfamiliar with.

Nedbank's pricing seems to confirm this, being roughly similar to its competitors. Brokerage is a maximum of 0,4% a trade (Global Trader is 0,5% and Dealstream is 0,3%).

Like other CFD brokers, Nedbank finances trades at an attractive interest rate. Here, it is priced the same as Global Trader, which lends money at the South African Futures Exchange Yield (Safey) plus 2%. Safey is currently 9,3%.

CFDs offer speculators exposure to most liquid JSE-listed shares. It allows them to bet on both upward and downward movements in share prices.

Like single-stock futures, CFDs offer traders strong gearing because a deposit of about 10% is required to enter a trade. Thus a 1% movement in the underlying share price translates to 10% on your capital outlay.

Nedbank's trading platform is called NedTrade. It is a free system that can be downloaded once the trader has successfully completed an application and the bank has accepted the investor's application.

Nedbank derivatives head Arthur Buchner says CFDs will appeal to savvy, risk-aware investors who are experienced in equity derivatives and are trading either directly online or via their stockbrokers.

Australia's capital markets in 2007

2007 will be an innovative year in Australia's financial sector. The ASX is set to launch exchange-traded Contracts for Difference. Since CFDs were introduced to the Australian market a few years ago the growth in the volume of contracts traded has been astonishing, no doubt at least partly due to the current bull market. This growth has also resulted in a significant increase in trading volumes of the underlying shares listed on the ASX, as the CFD providers hedge their exposures. So while the ASX has no doubt done well out of increased fees from trading, they obviously want to get a piece of the action for themselves. It will be interesting to see how their offering compares to the current leading CFD providers and how these providers will adapt to the new competition. I wonder if it will introduce opportunities for arbitrage? It also looks like the ASX will be one of the first exchanges to have listed CFDs, the only other that I have been able to find is the London Stock Exchange.

Whilst the ASX looks to innovate through new products, a consortium of sell-side banks and brokers led by the New Zealand Stock Exchange will be establishing an Australian ECN (to be headed by Greg Yanco, a former ASX exec), an alternative trading venue for ASX-listed shares.

From a technology perspective this will mean an increasing focus on the FIX protocol and I expect algorithmic trading will also increase rapidly in Australia. I wonder if AMQP might also play a role in the network's implementation?

CFDs close in on share trading - Australia

Contracts for difference (CFDs), a derivatives product which came out of nowhere five years ago, are now the second most popular trading instrument in the country with the Australian Stock Exchange (ASX) gearing up to launch their version next year.

Brisbane based trading software group Market Analyst Software surveyed more than 1,000 traders on their trading patterns and found that CFDs, which originated in the UK and launched in Australia in 2001, are used by nearly one in two traders.

While 86 per cent of respondents still trade shares directly, a high 47 per cent trade CFDs followed by 20 per cent who trade futures and commodities and 13 per cent who trade options.

"We were astounded by this. We asked them 'what instruments are you trading?' and I couldn't believe how many said they use CFDs. It has really taken off," said Matthew Verdouw, Market Analyst managing director.

He noted that CFDs are killing the market for warrants with only 3 per cent of the survey respondents trading in them.

"What we've done with our software is that we change it as people come along requesting different features. We used to have a lot of requests for options and warrants but that's a trickle now because people are all wanting to try CFDs," he said.

The Australian Stock Exchange (ASX) cemented the sector's potential further when it announced last month that it will launch the world's first exchange traded CFDs.

In the second quarter of 2007, CFDs will be listed on the Sydney Futures Exchange (SFE) platform with the proposed suite including Australia's top 50 stocks, major global indices and selected commodities.

They have already appointed so-called designated price makers (DPMs) namely Commonwealth Bank, Credit Suisse, IMC Pacific, Optiver, Susquehanna Pacific, UBS Australia, Merrill Lynch Australia and Timber Hill Australia.

Verdouw said, "I think the CFD market is going to explode. People are going to see that it's a simple and easy thing to trade. Of course there are greater risks but the analysis they've done on the raw stock is something they can apply on CFDs except they could get higher returns from the extra leverage."

Global Trader expands into Thailand

"Spread betting and CFD trading firm Global Trader (GT) has opened a Bangkok office to become the first foreign company to be registered with Thailand Securities & Exchange Commission and offer derivatives to Thai residents. From 1 October, it will offer CFDs to Thai institutional investors and non-residents who wish to access the equity markets.

"We will begin with Thai-bought CFDs and the next step will be CFDs on other markets. After these markets are established we plan to offer spread trading on futures, commodities, interest rates and indices," Brain Hoegee, who is heading up the operation, told FOW.

The move comes as volumes on Thailand Futures Exchange are beginning to gain traction. For example, in June, Set50 Index futures reached a record high average volume of 1,425 contracts per day. This is alongside regulatory changes making it easier for Thai residents to trade derivative contracts.

"Global Trader is very dominant in South Africa and there are a number of similarities between the two markets. Like South Africa's, Thai residents cannot invest overseas. There are also similar exchange controls and wealth distribution," says Hoegee.

Four staff members will initially be based in the office, which will serve as a sales and trading support for the firm's Asian clients or international investors looking for Asian exposure. Hoegee expects to be live in offshore markets by the first quarter of 2007, adding spread betting products by spring.

Call for a crackdown on CFDs

The City regulator has been urged to crack down on investors who use derivative positions to secretly build company stakes.

The Association of Investment Trust Companies (AITC), the industry trade body, wants investors who use contracts-for-difference (CFD) positions as a way of amassing large stakes in companies to be charged with market abuse. It has written to the Financial Services Authority urging it to amend its rules.

The call comes amid growing concern about CFDs and worries that their lack of transparency leaves them open to misuse.

The Association of British Insurers is also believed to be in favour of making CFDs subject to the same disclosure rules as ordinary shares. CFDs are derivative instruments that give an exposure to a company's share price without requiring the holder to buy the stock.

It is estimated that 40 per cent of the equities traded in London are hedges for CFD positions.

They have gained popularity because they avoid stamp duty. They also provide anonymity because the position is registered under the CFD counterparty, usually a financial institution.

The AITC has expressed concerns about the ease with which investors can convert CFDs into underlying shares courtesy of the counterparty, which holds the stock to hedge its exposure.

In this way, investors can build a significant stake in a company in secret and at a lower cost than if their intentions were known to the market.

These concerns were behind the Takeover Panel's decision to bring in new requirements to force CFD holders to disclose their identity during an offer period if they have a holding of more than 1 per cent.

Ordinarily there is no such requirement.

The FSA was sufficiently concerned to launch a three-month consultation exercise this year, and it will report its findings next month. Daniel Godfrey, director-general of the AITC, said CFDs could be used to build a stake in a company away from the glare of the public eye. "Out of the blue, you could suddenly find you have a shareholder who has a 15 per cent stake."

Mr Godfrey said that only shareholders who intended to purchase the underlying shares at a later date should have to notify their interest.

If they failed to do so, he said that they should be charged with market abuse.

Investors who bought a CFD as a short-term bet would not be required to reveal their identity.

The FSA's role in policing disclosure will be bolstered in January when it takes on new powers under the Transparency Directive, designed to create harmonised disclosure requirements across the EU.

The FSA will take on some of the powers currently exercised by the Department of Trade and Industry, including the requirement for investors to disclose holdings of 3 per cent or more.

Bourse in world first with CFD exchange

THE Australian Stock Exchange is establishing the world's first exchange-traded market for contracts-for-difference on the Sydney Futures Exchange, after yesterday naming eight broking firms as designated price-makers.

It is a move designed to create liquidity for the rapidly emerging investor appetite for CFDs, which have been around for about 20 years in overseas markets, but are just starting to catch on in popularity in Australia.

CFDs are a leveraged play on stock prices. Essentially, a CFD is an agreement between a buyer and seller to exchange the difference in value of a stock between when the time a contract is opened and closed. It gives an investor a chance to cash in on the performance of a stock, without owning it.

Big market players at the moment include Macquarie Bank, Man Financial and Perth-based Marketech.

After the new market is introduced, investors will be able to call their broker and ask for a BHP CFD, which will be traded through a price-maker on the SFE.

Like many derivative products, traders can also make money by betting on a downward movement of a stock or commodity.

Current volumes are unknown because CFDs are only traded over-the-counter in Australia.

By making an exchange-traded market for the product, the ASX said it would improve transparency and give secure counter-party backing.

"While CFDs have been one of the fastest growing product sectors in financial markets in recent years, the exchange-traded CFDs to be listed on SFE will become the first to offer all the benefits of central counterparty clearing, frontline regulation, liquidity provision and multi-broker access," the ASX said in a statement.

It is the first new product offering from the ASX since it merged with the SFE in July.

The designated price-makers are Commonwealth Bank, Credit Suisse, IMC Pacific, Optiver Australia, Susquehanna Pacific, UBS Australia, Merrill Lynch and Timber Hill Australia. The SFE is believed to have been looking at building the exchange for more than 12 months.

However, over-the-counter CFD traders believe the new market will increase the spreads for the CFD stocks on offer on the SFE model, because of the distinct price formulation in CFDs.

They argue that they can get the stock at real-market prices through access to real-time ASX boards.

The SFE said the exchange-traded CFDs will be listed across a broad range of assets, including global equity indices and major Australian stocks.

Foreign exchange crosses and key commodities, including gold and oil, will also be included.

Trading is scheduled to begin next April.

Law firm IDs further MiFID fears

Providers of CFD and spreadbetting services could be forced offshore because of MiFID best execution rules.

Ash Saluja , partner at law firm CMS Cameron McKenna, says its 20-strong team working on MiFID and other regulations has interpreted the best execution rules set to be applied to the three different types of clients - consumer (retail), professional (intermediary) and market counterpart - as meaning it will no longer be possible to do business from within the UK.

This is because the FSA - in its recent discussion paper on the issue of best execution - has suggested providers of CFDs and spread betting services should try to work according to a system of price benchmarking.

The problem with this solution is it would, for example, tie spread betters to a single price.

This does not recognise practical realities of the market, Saluja says, such as the fact spread betting takes place around the clock not just during stock market hours of operation, which would make it nigh on impossible to operate against a single benchmark price.

On the issue of CFDs (contracts for difference), Saluja says CMS Cameron McKenna has noted an increasing number of financial services clients looking to them as an alternative to shares.

It is an attractive market now, but will become more difficult to operate in post-MiFID because the products may simply not be offered.

The FSA has backed off somewhat from its initial stance, Saluja says, however: "I don't think there's a solution the FSA can come up with on its own."

Best execution is an EU issue, which means the FSA's hands are tied, he says.

If the industry does move offshore, the FSA would not be able to stop people taking advantage of the fact many, if not most, CFD and spread betting products are available electronically.

The situation is being driven by so-called "regulatory arbritrage", which rests on the fact different member states interpret EU rules and regulations differently. Post-MiFID the FSA will not be able to stop CFD and spread betting firms from offering services if passported into the UK from other EU member state, Saluja states.

US broker tells Irish clients to prove wealth or face huge trading

A major US stockbroker has told high-net-worth Irish investors to prove that they are wealthy or face costly sanctions.

Cantor Fitzgerald has told major Irish stockbrokers to instruct their clients who use Cantor's contracts for difference (CFD) products to prove they can sustain losses. Cantor has given the clients a deadline of July 1 to submit statements of their net worth.

Most of the Irish brokers, including Davy, Goodbody, Bloxham and Merrion Stockbrokers, act as retail distributors in Ireland for Cantor's CFDs. CFDs - highly leveraged derivative products that allow clients to bet on the direction of an underlying share price - account for over a third of all share transactions on the Irish stock exchange.

Cantor's demands come after clients lost money on their CFD bets in the last two weeks after sharp falls in Irish bank stocks. Last year, clients faced huge losses on CFDs after the share price of Elan.

In a letter sent on May 17, Goodbody Stockbrokers told its clients that it was ''most unhappy with the short notice'' provided by Cantor and said that it had expressed its ''dissatisfaction'' to the US broker.

Other brokers have also passed on Cantor's instructions to their clients.

The letter from Goodbody also said: ''Accounts that are supported by net worth statements are being charged a margin of 2 per cent over cost of funds, while for unsupported accounts the margin is 3.25 per cent.

''These new funding rates are being implemented by Cantor Fitzgerald with immediate effect. If a client provides a net worth statement before 1st July, then the funding rate differential will be rebated. As mentioned previously, we would ask you to provide a statement as soon as possible from your accountant or bank manager."

Eamonn Glancy, head of private clients at Goodbody Stockbrokers, said it would be up to individual clients whether they supplied the documentation of their net worth to Cantor.

Bloxham Stockbrokers managing partner, Angus McDonnell, said that Cantor was a wholesaler of the CFD product and that Bloxham clients had to decide whether to sign up to Cantor's terms.

Spread betting company Delta Index said it expected to benefit from the Cantor move.

Managing director Dermot O'Donoghue said the company did not seek statements of net worth from clients.

''We have received interest from CFD customers of stockbrokers who are upset at what they see as an unwarranted intrusion," O'Donoghue said.

Market sources said that many CFD clients had faced losses, particularly those betting on the direction of the underlying Anglo Irish Bank shares, amid the market turmoil of recent days.

Minister moves to offset Revenue decision on CFDs

There has been positive news on the tax front since the conference as Minister moves to offset Revenue decision on CFDs - The St Patrick's Day decision to change the tax treatment of CFDs on equities retrospectively, which has potentially a major impact on the Irish market, and on Irish equities has been put on hold by the Minister for Finance. In a statement issued on March 30th* (see below), the Minister indicated that the move will be repealed.

Full text of Department of Finance statement issued on March 30th: "Cowen to review Stamp Duty on Share Transactions: Contracts for Difference "The Minister for Finance, Mr Brian Cowen, TD, today indicated that, in view of uncertainties and difficulties of which he had become aware, he plans to review the law as it relates to stamp duty on share transactions which underlie trading in Contracts for Difference based on Irish equities. The Minister said that he was anxious that the market in Irish equities would continue to be a modern, liquid market, conducive to capital acquisition by Irish firms. His Department would consult with the Revenue Commissioners and with market participants with a view to appropriate announcements being made in Budget 2007". Note: A Contract for Difference is an instrument issued by a financial institution entitling the purchaser to take gains or losses arising from movements in the market price of, for example, a share or index.

Pension Diary

I set myself the challenge of turning my self-invested personal pension from £122,000 into £1m in three years, starting on July 1, 2005.

To help me, I use contracts for difference, CFDs, which are stock substitutes and provide me with gearing several times my initial capital. For example, when starting, I was able to have exposure of nearly £1m, about eight times my starting capital which, if handled correctly, can enhance returns considerably.

At the start of this year, my pension was valued at £150,000. By the first week of February, it had risen to £180,000 and by the third week of March (the time of writing) has risen to £230,000. That is a 50% increase in less than three months.

Certain points emerge. I notice, for example, that from Monday March 6 to Wednesday March 8, the pension dropped from £205,000 to £180,000. So great was my pain on that Wednesday afternoon, with all the stock markets falling and Wall Street expected to drop 100 points on the open market that I had to leave my office and seek refuge on the driving range. Otherwise I might have panicked and sold at the bottom.

Of course I did not know that this was the bottom at the time, but I realised when I came back that the 100-point drop from Wall Street had not materialised and, in my experience, this was a "tell" that the fall was not going to continue.

It would have been an appropriate punishment for me if I had sold on the Wednesday only to see the market rally to over 6000 for the first time in five years. The market is a femme fatale adept at relieving us of our money and making us feel foolish at precisely the time when we should be increasing our exposure, not decreasing it.

These sorts of leveraged gains (and losses) are quite common in currency markets, which are relatively stable by comparison to individual shares but, until recently, were unheard of in the UK. In fact, prior to the introduction of CFDs, the private investor was limited to dealing in traded options or dealing on extended settlement.

Traded options have never caught on in the UK and consequently are only available on a limited amount of shares, whilst dealing on extended settlement is ham-fisted and very expensive. CFDs are available on every share for as long as you require and, when held within a Sipp, there is no tax to pay on the profits.

Not surprisingly, a raft of new firms have been set up to meet the demand, and three have floated on the stock exchange - IG group, London Capital (which operates the spread betting company Capital Spreads) and IFX.

In addition to CFDs on UK and US equities, all firms offer indices, currencies, commodities and interest rates - all of which can be traded as spread bets. There is also the lucrative sport betting market (which will be a money spinner over the period of the World Cup). All three companies reported results in line with robust trading in most markets, and I have a position in IG group in my pension and IFX in my personal equity plan.

I recently established a position in Aero Inventory in my pension. The company is a wholesaler of aircraft parts and reported strong six-month results. However, these results could not take into account the £92m the company rose through a placing at 433p and a rights issue at 300p - more than doubling its market capitalisation and allowing it to tender for bigger contracts. New forecasts are for pre-tax profits to rise from £6.8m to £11.9m this year, jumping to £28.7m in 2007-08, equivalent to a price/earnings ratio of 30, then 16.8 falling to 6.9 - very cheap.

Barnett Alexander is a director of Echelon Wealth Management Limited.

FSA plan to let stakes stay secret up to 5%

Secret stakebuilders in London-listed companies could keep their activities hidden for longer under proposals tabled by the chief City regulator yesterday. The Financial Services Authority said it was considering whether to scrap the present rule that forces stakebuilders to disclose holdings as soon as they go above 3 per cent of the target company.

The threshold could be raised to 5 per cent, which is the minimum standard across Europe, the FSA said.

The disclosure regime could be further weakened for larger holdings. At present shareholders have to notify the market at each 1 per cent notch above 3 per cent.

One option would be for notification only at the 5, 10, 15, 20, 25, 30 and 50 per cent levels, the FSA said.

Stakebuilders could also be given more time to disclose to the market. At present they have to do so within two days of the notifiable event, but this could be lengthened to seven days.

The FSA, which is taking over responsibility for disclosure from the Department of Trade and Industry, said it was inviting views on either retaining the existing regime or moving to the European minimum, as set out in the Transparency Directive.

It also announced that it had no intention of broadening disclosure rules to cover derivatives such us contracts for difference (CFDs). Stakebuilders can secretly build large positions in companies by buying CFDs rather than the underlying shares.

City professionals said the proposals might be welcomed by arbitrageurs and corporate raiders but not by companies.

Nicholas Gold, a corporate financier at ING Barings, said: "I can't see why companies would like this. It would make it easier for predators to acquire covert stakes."

There may also be disappointment that the FSA, unlike the Takeover Panel, does not plan to extend the rules to CFDs and other derivatives.

An FSA spokesman said the new rule could create cost savings for institutional investors but would reduce disclosure. The regulator was leaning towards keeping the present regime, he said.

In separate proposals the FSA also paved the way for hedge funds to list in London and for traditional investment trusts to short sell for the first time. It said it wanted to scrap prescriptive rules on London-listed investment vehicles in favour of a more flexible principles-based regime.

The proposals would allow individual hedge funds to list in London, making them more accessible to private investors of modest means. They would also give greater freedom to investment trusts, allowing them to go short - in effect, bet on a share price falling -and to invest in derivatives. The rule preventing investment trusts allocating more than 15 per cent of their portfolio to a single asset would also be scrapped. However, the FSA said that investors would be protected by a strong disclosure regime, under which listed vehicles would have to explain annually how they were spreading risk.

Exchange alarm as Revenue eyes CFD stamp levy

Stock Exchange officials will meet the Revenue today in a continuing campaign to head off the imposition of stamp duty on a major hedge fund activity.

The Revenue wants to tax 'Contracts for Difference', or CFDs. According to estimates, these account for around €3bn a month in trading on the Irish exchange, or 30pc of the total.

CFDs are highly leveraged, like most hedge fund dealings, and investors can borrow up to ten times the actual capital they put in and add it to the contract. This makes for big gains (and losses) on the investor's capital.

Because they do not actually buy the shares, but strike a contract on the movement, the deals have been exempt from stamp duty. Revenue is concerned at the potential loss of €30m a month if 1pc stamp duty were levied.

The Exchange and stockbroking firms argue that the business will switch to London, so the revenues will not be achieved. They fear that Dublin share prices and turnover would fall, and that other leading companies would relist on London.

"A reduction in turnover like that, combined with CFD holders becoming sellers of stock, could create significant downward pressure on the stock market," said Adrian O'Carroll, head of equities at Merrion Capital.

The issue, it is believed, could end up in the courts.

South Africa: Online Trader Has Big Expansion Plans

Online financial derivatives business Global Trader is planning a big move into new markets as it capitalises on its emerging market focus in its spread trading and contract for difference (CFD) business.

It says lessons learnt in the past will guide it as it opens offices in Russia, the Middle East and Australia. Global Trader launched in 2000, the first company to offer spread trading and contract for difference execution in SA.

CFDs allow investors to trade in the price movements of a stock, commodity or index without actually having to take ownership of the underlying asset. The main clients for CFDs are hedge funds, while spread trading attracts more retail investors.

The group broke even in 2001, seven months after launch, and planned a rapid expansion. "We ran before walking," says MD Charles Savage. "We wanted to get into Europe and we were lead to believe the easiest way was through Ireland."

The group started operating in Ireland in January 2002 and moved its trading desk function there. Shortly thereafter it also expanded to Canada as part of a joint venture.

Getting the approval of Ireland's financial services authorities would make it easier to operate elsewhere in the European Union.

However, the Irish regulators later said they were not interested in regulating the CFD market in Ireland as it was not big enough. So in 2004, Global Trader moved its trading desk back to SA.

Savage says the group was naïve in thinking it could adopt the same strategy it had employed in SA in Ireland.

Instead it set its sights on London, applying to the UK's Financial Services Authority (FSA) for a licence to operate in that market.

Savage says this was a key development for the business as FSA approval could be used as a "passport" into other markets.

"The regulatory hurdles in the UK are high. We completed the process in nine months and got approvals in June 2005," he says.

This helped fulfil the company's global aspirations.

After the FSA approval, Global Trader has been regulated to enter Thailand and reregulated to go back into Canada. Many of its competitors in Europe are focused on developed markets, leaving a gap for Global Trader.

"Our key differentiator when we sell ourselves globally is our emerging market focus," says Savage, adding that the group's Asian coverage includes Thailand, Singapore, Malaysia, Hong Kong, Indonesia and Korea.

Global Trader is setting up in Moscow to handle the Russian and eastern European market, while Turkey, Bulgaria and western Europe are handled from London.

It is also looking at opening a regional headquarters for southeast Asia and Australia in Sydney and using Dubai as a springboard into the rest of the Middle East, North Africa and southern Asia, including India and Pakistan. In markets where Global Trader cannot go it alone, it will go in with a partner.

In Singapore, for instance, Global Trader has linked up with one of that country's top banks, called CIMB.

"Our focus is to build our business around emerging markets competitors have been too slow or monolithic to target," Savage says.

Despite the expansion outside SA, growth here will be robust as hedge funds come of age.

An average 30% of volumes on the London Stock Exchange are derived from CFDs and the biggest audience for those are hedge funds.

This year could be a defining year for hedge funds in SA, particularly if the JSE bull run starts to slow, says Savage.

 Past CFDs Industry News