Margin Requirements

Changing Margin Requirements

Q:Why do brokers reserve the right to close out a short position or change the margin requirements?

The other thing that worries me about CFDs is that the small print often says that they can close out a short position at any time, for any reason, or change the margin requirement at any time, without notice. (This happened on the day of the HBOS debacle – At the start of trading, margin requirement was 5%. After the HBOS price initially dipped 20%, before recovering to -10%, the margin requirement was changed to 100%. Anyone who had any leverage at all, received a margin call or had their position closed out at a 10% loss).

A: I like that you actually bother to read the small print. On the margin change point, the reason for this mostly is because the prime brokers have changed the margin rate they themselves demand from your CFD provider.

There are clients who shop around for the best margin rate and sometimes you will find that the CFD provider gives you a better rate on margin than they are getting from their prime broker. Larger you are, the more likely…

Not sure about the ability to close a short for any reason; this could be in response to stock borrowing issues it strikes me.

Q:Maybe this is why most of the providers insist on only taking on ‘intermediate’ customers (or whatever the current equivalent is)?

A: No. the reason for this is historical (historical thanks to MiFID). Prior to MiFID, any one with FCA permission to offer spread bets to ‘private customers’ (let’s say punters in most cases) did not have to demonstrate to the Financial Conduct Authority (FCA) that they would give so called ‘best execution’ to these clients. This was because the FCA granted a waiver since a “bet” by its very nature—and for which nature it historically gets tax free winnings treatment from HMRC–is secretly priced, so to speak. Best execution theoretically runs counter to this concept, so the FCA had to give the waiver.

Meanwhile, anyone classified as an ‘intermediate customer’ by this fact waived any right to receive best execution. Consequently, most every provider only offered CFDs to “intermediate customers” and up (“up” then being “market counterparties”).

Theoretically, in the old days, you could offer CFDs to punters, but there was little appeal as CFDs attract capital gains tax on winnings whereas spreads don’t.

The sea change under MiFID hit squarely on the “intermediate customer” concept. Eligibility for IC status pre-MiFID was based on rough industry custom, e.g, if you stated you traded at least X times in the last year and had Y funds to spend, you would be eligible to consent to Intermediate Customer treatment.

MiFID chucked this all out. Under MiFID no one can be a “Professional Customer” unless 2 of 3 objective criteria are demonstrated in the account application. And they ain’t easy to demonstrate! Stuff like €500K of assets (house doesn’t count).

But in the end it doesn’t matter so much. The real reason firms wanted you to be classified as Intermediate Customer before was because your funds could be given non-segregated treatment. This is very important in the CFD/spreads business because only if you are non-segregated can the company move your funds to their broker when you open a trade. Otherwise they have to leave your money sitting until you close (and make a loss).

Q:Do you have any general advice in dealing with providers?

A: Read the providers’ statements very carefully and understand all the conditions. If not, you will be surprised sooner or later by how the provider works.

Never, never, never use maximum leverage with CFDs. You will go broke and then some. Before using CFDs make sure you can successfully trade the underlying instrument including understanding how to quantify and manage risk and then proceed to use the CFDs to allow you to take on risk lower than what your cash will allow.

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