An Introduction to Contracts for Difference

Transcription

1 An Introduction to Contracts for Difference By: David Patten Director and Compliance Officer City Credit Capital (UK) Ltd. cccapital.co..co.uk

2 Building Labuan Today, Asia accounts for a majority of GDP growth worldwide and most companies are focusing on moving in and setting up operations locally. However, with proper exposure via the internet Companies may bring the world to the individual. LOFSA can become a market leader by being the 1st Asian Financial Authority to recognize and regulate the booming Contract For Difference (CFD) market.

3 What are Contracts for Difference? CFD a contract between a client and broker to exchange the difference between the opening and closing price in cash only. Markets Covered any financial product currently listed may form the basis of a CFD. CFD products are traded based on live exchanges pricing but offer more flexibility than traditional markets.

4 History and Growth Early 1970 s - trading began Banks and Fund Managers would hedge open positions The Financial Services Authority (FSA) begins regulation of the CFD market as individual investors enter market. Today, equity based CFD trading represent 40% of the daily volume on the London Stock Exchange (LSE).

5 Current Market Offering City Credit Capital (UK) Ltd offers: Current Global Markets DJI and NASDAQ equities CBOT, CME and NYMEX futures All European equity markets (DAX, CAC, MLB, etc) Global Indices: HKSE, Nikkei, LSE, DJI and NASDAQ Global FX markets These are just the beginning ing of things to come as a single trading platform can offer global products.

6 Benefits to Clients Leverage margin requirements are 5 20% of the overall value of a trade. Diversification a single client account can be used to trade Global Equities, Commodities and Indexes. Tax avoidance of Stamp Duty but clients must still pay taxes on profitability. No Low Commissions most CFD contracts are traded on a commission free basis.

7 Benefits to Brokers Principle enables brokers to handle risk in- house. Client orders maybe matched against other client orders to hedged in the market. Diversification a single Broker may offer access to FX, Futures and Equity Markets. Cost Savings no Exchange fees, discounted price feeds, centralized marketing and dealing staff.

8 Trading Example Traditional Broker Mr. X buys $50,000 of for a total of 2,000 shares. Margin Requirement: $50,000 He receives a dividend of.25 per share or $500 total. The shares are then for a profit of $2,000. Considering a.25% commission rate charges equal $125 or $250 round turn. Profit: , = $2,250 ROI: 2,250 / 50,000 = 4.5% CFD Broker Mr. X buys $50,000 of for a total of 2,000 shares. Margin Requirement: $5,000 He receives a dividend of.25 per share or $500 total. The shares are then for a profit of $2,000. Considering a.25% commission rate charges equal $125 or $250 round turn. Profit: , = $2,250 ROI: 2,250 / 5,000 = 45%

9 Current Trends Since introducing CFD to the retail market in 1997 the market has doubled in size each year, today 40% of LSE volume! Today clients are more likely to handle their own portfolios than ever before due to online access to markets and information. Investors are moving from long term to short term investments as market volatility increases.

10 UK FSA Regulation There is little doubt that the UK Financial Services Authority is a world leader in regulation policy. The FSA recognizes that its primary duty is to ensure the full faith and creditability of the UK financial system. Know Your Customer (KYC) rules: are strictly enforced. All clients must submit a Financial Assessment and Product Assessment forms.

11 UK FSA Regulation con t If clients are from FATF (financial Action Task Force) compliant countries a passport and utility bill must be provided to ensure identity. If clients are from non-fatf compliant countries then ID and Proof of Address must be notarized by a government official, bank or attorney. Anti-money Laundering (AML) further limits how money may be deposited and withdrawn by clients.

12 Further Restrictions and a Guarantee Due to the amount of leverage involved the UK has chosen to restrict the CFD market to Intermediate or Expert Clients: with a net worth of over $200, month derivatives or 2 years equity trading. Client funds are guaranteed by the FSA to100% of 1st 30,000 and 90% of next 20,000. Even with the above restrictions the CFD market is booming with no sign slowing down.

13 Conclusion The current generation is comfortable with the internet, online shopping, banking and brokerages services are all booming. Physical location of online brokerage house is of little consideration provided all clients feel that their funds are secure. Labuan being in Asia and as a limited tax zone both clients and companies can benefit provided LOFSA chooses to allow and regulate the CFD market.