Why are CFDs not permitted in the USA?


Q.: Why are CFDs not permitted in the USA?

A: It is interesting to point out that contracts for difference are not currently permitted to by USA residents (and citizens?) due to restrictions by the Securities and Exchange Commission on over-the-counter financial instruments. This is kind of odd given they rule trading in many other markets in the global market place now and replaced much of the need to trade options for leverage, so in part it's to protect the options market revenues in the USA I guess, and protect them from those 'evil derivatives that will be the end of the world', CDO's are much safer huh. Given the current overreaction on regulations on trading in the USA it's not expected CFDs will get the green light anytime soon as the leverage provides the potential to stuff up in spectacular fashion if you get it wrong, as in futures.

So why exactly arenít CFDs available for trading? The main reason why CFD trading is not available to US traders is because it is against US securities law. Over the counter financial instruments, such as CFDs, are heavily regulated through legislation like the Dodd Frank Act and enforced by the SEC (Securities and Exchange Commission). This power was granted under Title Vii of the act when CFDs were defined as either a swap or securities based swap, unless otherwise excluded.

 

Q.: Will CFDs ever be allowed in the USA?

A: Well, in the States you have the exchanges that are protected by the government and who have a very strong lobby there as well, so a private client has to trade a product traded on an exchange. Currently the USA regulatory regime excludes the availability of CFDs. The answer on whether this will change will probably be that if they do not allow CFDs, then the USA exchanges will continue draining liquidity and volume as USA equity trading moves to more favorable centers (for instance Goldman quotes US equity CFDs to some CFD providers out of London but cannot do the same for their USA clients in the States!). This when the USA prides itself on its capitalistic outlook...

Will CFDs Ever be Available to Americans? After the financial collapse of 2008 there has been a great demand for increased market regulation. Given the current regulatory environment in the United States, there are no expectations for CFDs to be available for trading soon. While regulations can always be changed or amended, until that point, CFDs will remain unavailable for US traders.

I won't start on my tax rat but let me just say that being a USA citizen, and even worse domiciling in the USA (versus a foreign country where you get ~80K/year tax exemption), you are truly a slave to the 'free republic'. They are going to get their money out of you one way or the other...Many people from other countries are shocked and horrified to find this out, including a friend of mine who became a USA citizen (UK expatriate) without realizing he couldn't (legally) do the tax avoidance scheme he used to do before. He turned 10 shades of white once learning the price to pay for the (apparent) opportunities provided. Since there is no tax benefit USA traders have liquid options and futures markets (the latter of which currently has more favorable tax treatment then any other short-term instrument to my knowledge), contracts for difference are somewhat redundant although I think that the simple fact that revenue is being drained away from their exchanges may eventually lead to changes in their laws to permit CFD trading at some point...

The only exception in the USA is forex trading as there is no regulated exchange there for foreign exchange. So you can actually trade foreign exchange in the States in practically the same way that you can trade them in Europe in terms of the CFD full risk that's involved in the product. But if you wanted to trade gold, oil, commodities or securities you have to trade them on an exchange in the USA.

Q.: I know that USA residents are not permitted to do CFD trading but currently I'm in Mexico and I have a temporary residence card (green card). Could I do CFD trading?

A: Unfortunately, if you are a USA citizen or paying US tax at all then most providers wouldn't be able to accept you as a client. However if you are paying tax solely in Mexico then this might be fine with some brokers. As such, if you are currently residing in Mexico, you will be able to trade CFDs with some brokers, but if you are moving back to the US or your main residence is in the US, you won't be able to trade them. Some providers like CMC Markets don't even accept clients from Mexico. Most providers won't offer accounts to citizens, nor residents of the USA due to regulatory reasons.

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