Over-the-counter contracts for difference, much of it driven by retail traders who value the simplicity and value that CFDs offer are also on the increase in South Africa.
Single-stock futures (SSFs) contracts have overwhelmingly ruled trading activity on the Johannesburg Stock Exchange (JSE) for the last few years. In the last quarter of 2007, single-stock futures accounted for a almost 80.5% of all contracts traded on the stock exchange – making South Africa one of the world’s biggest markets for single-stock futures – however the dominance of single-stock futures is being challenged by increasing demand from retail investors into CFDs. An advantage that CFDs have over single-stock futures is the absence of dividend exposure – in fact as opposed to single-stock futures which are priced using a forecasted dividend, a CFD contract entails the agreement to swap dividends.
Presently over-the-counter derivatives such as CFDs in South Africa are not regulated or guaranteed by an exchange which introduces the counterparty risk element. In South Africa, they are also not regulated by the Financial Services Board. This also means that investors would do well to exercise caution in both the selection of CFD provider and the size of the position on any derivatives product and to understand the risk of any investment decision made.
In contrast, such risks are mitigated with derivatives traded on an exchange such as the Johannesburg Stock Exchange, through risk management and guarantee structures. At the JSE exchange, the investor is interacting with a member of the exchange who in turn deals with a clearing member which in turn deals through Safcom, the clearing house of Safex. In a worst-case scenario, because the JSE (Johannesburg Stock Exchange) itself is holding the client margins, these contracts can be seamlessly transferred to other members and the investor remains unaffected.
Recently, FTSE 250-listed IG Group Holdings, the power behind CFD provider IG Markets has announced its acquisition of South African (CFD) company, IdealCFD Financial Services. The South African operation will be known as IG Markets South Africa and James Bishop, formerly boss of Ideal CFDs is now the CEO of IG Markets South Africa.
One of the greatest impediment to further growth of contracts for difference are exchange controls because under exchange control rules an institution cannot lend money to a foreign company/party for investing. This means that any non-South African trading in the CFD market cannot gear up by borrowing from one of the country’s banks. Also, institutions are only able to deal with exchange-traded products which limits the institutional flow in CFDs. A loophole does exist in that banks can lend money for trading if the client goes through a regulated exchange – i.e. the JSE. Quite unusually for an OTC derivatives product regulation could prove the making of CFDs and currently the South Africa’s Financial Services Board is looking to regulate the market.