Contracts for Difference (CFDs)

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1 Contract for Difference (CFDs) and FCA Disclosure Requirements What are Contract for Difference (CFDs) CFDs (also known as Synthetic Equity Swaps (SES)) are Over the Counter (OTC) transactions which allow you to trade without having to put up the full underlying contract value. A CFD is an agreement between two parties to settle, at the close of the contract, the difference between the opening and closing prices of the contract, multiplied by the number of underlying shares specified in the contract. CFDs are traded in a similar way to ordinary shares. The prices quoted by many CFD providers is the same as the underlying market price and you can trade in any quantity just as you would with an ordinary share, you will usually be charge a commission on the trade and the total value of the transaction is simply the number of CFDs bought, or sold, multiplied by the market price. However, there are some distinct differences from trading ordinary shares that have made them increasingly popular as an alternative instrument to speculate on the movements of shares or indices. Advantages of Contracts for Difference (CFDs) Contracts for Difference (CFDs) are traded on margin so you can maximise your trading capital. No Stamp duty is payable (saving 0.5% compared to a traditional share purchase). You can profit from falling or rising markets by trading long or short. A single account can give you access to far greater range of financial markets. You can limit & manage your risk using a Stop Losses and Limit orders. Risks of Contracts for Difference (CFDs) The geared nature if margin trading markets means that both profits and losses can be magnified, and unless you place a stop loss you could incur very large losses if your position moves against you. It is less suited to the long term investor, if you hold a CFD open over a long period of time the costs associated increase and it may be more beneficial to have bought the underlying asset. You have no rights as an investor, including no voting rights.

2 Key Features of Contracts for Difference (CFDs) Traded on margin Rather than pay the full value of a transaction you only need to pay a percentage when opening the position called Initial Margin. The key point is that margin allows leverage, so that you can access a larger amount of shares than you would be able to if buying or selling the shares themselves. The margin on all open positions must be maintained at the required level over and above any marked to market profits or losses in order keep the position open. If a position moves against you, and reduces your cash balance so that you are below the required margin level on a particular trade, you will be subject to a "Margin Call", and will have to pay additional money into your account to keep the position open, or you may be forced to close your position. Trade in rising or falling markets CFDs allow you to trade LONG or SHORT. A Long Trade is where you BUY an asset with the expectation that it will rise, just as you would when buying a normal share. A Short Trade is where you SELL an asset that you do not own in the expectation that the price will fall and you can buy the asset back at a cheaper price. Shorting in the ordinary share market is almost impossible. With CFDs, however, you can go short as easily as you can go long, giving you the ability to realise a profit, even if a share price falls, as long as you trade the right way. No Stamp Duty Because you don't actually physically buy underlying shares with CFDs, you don't have to pay stamp duty, thereby saving 0.5% when compared to a traditional share deal. Commission Commission is charged on CFDs just like on an ordinary share trade, the commission is calculated on the total position value, not the margin paid. Overnight Financing Because CFDs are traded on margin, if you hold a position open overnight it will be subject to a finance charge. Long CFD positions are charged interest if they are held overnight, Short CFD positions will be paid interest. The rate of interest charged or paid will vary between

3 different brokers and is usually set at a certain percentage above or below the current LIBOR (London Inter Bank Offered Rate). The interest on position is calculated daily, by applying the applicable interest rate to the daily closing value of the position. The daily closing value is the number of shares multiplied by the closing price. Each day's interest calculation will be different unless there is no change at all in the share price. Trade Shares and Indices CFDs allow you to take a view on shares and indices and some CFD providers also allow trading on currencies and sectors. Risk Management Facilities Because of the higher risk nature of trading on margin, many CFD providers offer comprehensive Stop Loss and Limit Order Facilities, so that Investors can manage their risk in fast moving markets. FSA Disclosure Requirements The Financial Services Authority (FSA) (now the Financial Conduct Authority) introduced a major change to the UK's shareholder disclosure regime, effective 1 st June The regime was extended to include contracts for differences (CFDs) and other cash-settled financial instruments that provide exposure to the economic performance of shares (referred to collectively as CFDs). This applies to UK incorporated companies admitted to trading on a regulated or other prescribed market, and broadly requires that gross long CFD positions are added to currently disclosable positions to identify whether disclosure thresholds are exceeded, and consequently, if disclosure is required. The new requirement also includes any financial instruments that entitle the holder to acquire shares that have not yet been issued (such as convertible bonds, warrants and rights arising under rights issues and placings). This applies to all shares of UK incorporated issuers admitted to trading on a regulated or other prescribed market. It applies to all holders wherever they are located. The disclosure rules are as follows:

4 Physical holdings in shares Physically settled long derivative positions (as per current rules) Positions in cash settled financial instruments providing exposure to the economic performance of shares that give rise to a long position (including long call options, short put options, swaps, CFDs, convertible bonds, rights etc). This includes any financial instruments that entitle the holder to acquire shares that have not yet been issued (such as convertible bonds and warrants) and basket trades (such as ETCS - Define) subject to the exemption set out below No netting of longs and shorts in the physically settled and/or cash settled instruments is permitted The rules require calculation on a delta basis. A transitional period, permitting disclosure on a nominal basis (provided there is full disclosure of the strike price) Disclosure Thresholds: Disclosure at 3% and 1% increments thereafter. The denominator remains the issued share capital of the Company (free float) Exemptions: Baskets: exempt if exposure to the economic performance of the shares is less than 1% of the relevant share class and such exposure comprises less than 20% of the value of the basket (subject to anti-avoidance measures). N.B. Baskets include ETCS, indices and similar instruments. No requirement to disclose if these conditions are not met due to passive changes. Client Serving Intermediaries: exempt where regulated intermediaries are acting in a client facilitation capacity. To take advantage of this, certain conditions need to be met and a certification sent both initially, and on an annual basis to the FCA with a PDF copy to Certain intragroup transactions : where undertaken for tax or accounting reasons Revised Rules: An underwriter does not need to disclose any long position in the economic performance of shares held by virtue of obligations under a conventional underwriting or sub-underwriting contract in relation to a rights issue (Q16); A person who passively receives rights on a rights issue solely by being an existing shareholder and who does not change their proportionate interest will not have to

5 include those rights in the calculation of their position in the shares (Q19); and Any person who actively acquires or disposes of rights during a rights issue (so that their proportionate holding will change after the new shares have been issued) will be expected to include all the rights, whether acquired actively or passively, in their calculation of their position in the shares (Q19). CFD Positions in Share Register Analyses With regard to CFD holdings in a share register it is not our practice to include the client who has taken the position, The Market Maker that has sold the CFD to their client will often hedge their position by buying shares in the market. As a result, they are required to disclose this holding, and therefore it is often the banks acting as counterparty to CFD trades that show on the share register. These holdings will appear on the register as Market Maker accounts (even though they are proprietary desk trades/holdings), and can sometimes be registered in a stock lending account if they are larger holdings. It is only when the CFD is exercised that the shares will be registered into the clients name and will acquire subsequent the voting rights. Hedge funds will often contact management claiming that they hold a 5 or 10% stake through CFDs in order to get a meeting. These requests often overstate their true holding / exposure for effect, though increasingly shareholder activists have taken small (~1%) stakes and try to instigate change, break-up or takeover bids in certain cases. Notwithstanding the above, although the shares do not belong to the client until the contract is exercised; there may be a certain element of control in the voting rights of those shares.

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