Contract for difference

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Contracts for difference (CFDs), are derivatives that give a trader the ability to trade a wide range of financial instruments, including stocks, indices, commodities and currencies across international markets. The parties to a CFD agree to an exchange of a difference between the opening and closing price of a financial instrument.[1] The CFD lets the trader take a view on price performance without granting ownership of the underlying asset.

CFDs are currently available in listed and over-the-counter markets in various countries, including United Kingdom, New Zealand, Germany, Switzerland, Italy, Singapore, South Africa, Australia and Hong Kong. CFDs are referred to by a variety of names, depending on where they are issued. They are sometimes called Turbo Certificates or Waves. In Hong Kong, they are referred as Callable Bull/Bear Contracts.[2]

Regulatory issues

Contracts for difference came under regulatory scrutiny by the European Securities and Markets Authority and in the United Kingdom by the Financial Conduct Authority, (FCA). The regulator put permanent restrictions on marketing and selling CFDs to retail investors beginning August 1, 2019. Regulators cracked down on the use of CFDs after finding firms were offering them to retail customers with higher leverage, which ultimately meant larger losses in some cases. The FCA rule limited leverage between 30-to-1 and 2-to-1, and to close a customer's position when funds dropped to 50 percent of the margin needed to hold it open. The rules also state that customers can not lose more than the total funds in their CFD accounts, and firms must provide risk warnings.[3]

The move by the FCA followed a total ban on binary options to retail customers in April 2019.

References

  1. CFDs. forex-cfds.com.
  2. Contract for Difference. Reuters Financial Glossary.
  3. FCA reveals permanent CFD retail restrictions. Investment Week.