The Difference between Single Stock Futures (SSF s) and Contracts for Difference (CFD s)

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2 The Difference between Single Stock Futures (SSF s) and Contracts for Difference (CFD s)

3 SSF s (Single Stock Futures) CFD s (Contracts for Difference) Have a set expiry date: Upon expiry of the contract the investor can physically buy or sell the shares from the other side of the contract. Exchange standardised futures contracts expire every 3rd Thursday of March, June, September and December. No expiry date: CFD s don t have a set expiry date and interest is charged on a daily basis. The interest rate could differ daily and for different clients. Rollover Fees: As expiry approaches you may want to extend the life of your futures posicon. This will require you to close your current posicon and open a new posicon in the next expiry: this is a rollover. For rollover trades a trading fee is payable. This fee secures your interest rate and the principal amount on which the interest is based uncl the next expiry. No Rollover fees: As CFD s do not expire into a physical delivery no rollover fees are payable.

4 SSF s (Single Stock Futures) Have a set principal amount: Interest rate and the principal amount on which interest are based on are agreed upfront. This means the cost is transparent and certain upon entering the transaccon. Because it s included in the purchase price of the SSF, it may seem more expensive than the hidden cost in a CFD. CFD s (Contract for Difference) Principal amount changes based on share price: Interest rate and the noconal exposure amount, can fluctuate daily. The noconal exposure amount on which the investor pays interest, will increase and decrease as the underlying share price fluctuates. If the share price therefore moves from R100 to R120, the interest payment will now be based on R120 and not the inical R100. The net effect is that CFD's interest costs' can fluctuate. This makes it very hard to ascertain the true cost of a CFD

5 Wholesale Interest Rates: All market makers compete for business and as such the best implied interest rates are available to any individual that accesses the market. Retail Interest Rates: As the capcve client of a single market maker you will only be able to access one market maker s interest rates. This could mean that you are not receiving the best rates. The average interest rate observed during January 2011 was approximately 6.2% paid for going long and about 5.0% received for going short on for example AGL or MTN. Due to the clearing house structure of the equity derivacves market, there is very limited counterparty credit risk. Because of the clearing house structure retail clients can receive wholesale interest rates in the Single Stock Futures market. The interest rates charged varied from provider to provider and from customer to customer. They also fluctuate daily. On average for retail customers a cursory survey seemed to show that CFD providers were charging higher interest rates for longs and paying less for shorts. Part of the growing popularity of CFD s is that they are a profitable product for CFD providers. These higher profits are due in large part to the higher interest they can charge.

6 Free Markets: MulCple Financial Service Providers compete on a centralised order book to provide investors with compeccve prices. The investor or his broker can shop around for the best deal without switching costs. This enables the investor to obtain the best deal possible. CapJve Markets: Each CFD provider sets their own prices and it is difficult and Cme consuming to compare prices. Changing of providers is more difficult in a CFD environment compared to an exchange environment. Investors also only see the prices of their CFD provider rather than a market related price.

7 No dividend paid/received: dividends are incorporated in the futures price to pre- empt the theoreccal drop in the share price. SSF s value therefore excludes the dividend. Manufactured dividend paid/ received

8 Can take physical delivery: Upon expiry of the contract the investor can physically buy or sell the shares from the counterparty on the other side of the contract. Can't take physical delivery.

9 Can take physical delivery: Upon expiry of the contract the investor can physically buy or sell the shares from the counterparty on the other side of the contract. Can't take physical delivery.

10 Risk management structure: SSFs traded on the JSE are supported by the JSE's risk management structures. The client trades with a member of the exchange (broker) who in turn deals with a clearing member (generally a bank) who in turn deals through Safcom, the clearing house. In the event of a default, this structure protects the investor from undeserved losses. Risk: In a CFD contract, the two counterparces are compelled to take on each other's risks. An investor carries the risks of the CFD provider. Indirectly, investors in CFDs also take on the risks of all investors who have traded with that CFD provider. Further risks for investors include whether the CFD provider is hedging its exposures effeccvely, the quality of its compliance procedures and its general risk management procedures. If problems arise, investors cannot transfer their CFDs to other instrument writers. The JSE cannot assist when a CFD provider defaults on its contracts.

11 Seems complex, but has transparent costs that are agreed upon in advance. Instead of paying R100 for a share, you'll pay R105 for the SSF. This R5 is the interest that you'll pay for the posicon over the year with a 5% per annum interest rate. Seems simple, as you only trade the R100 share price. Each day the investor will be charged an unpredictable interest rate on an unknown noconal amount. This means that CFD s interest costs can vary massively and o`en end up significantly more expensive than SSF s

12 SimilariJes between Single Stock Futures (SSF s) and Contracts for Difference (CFD s) Take advantage of price movements in the underlying share Gearing refers to the fact that investors can get exposure to a large amount by only placing a small deposit. Due to this gearing, SSFs provides exposure to the underlying share at a much lower cost than trading in the underlying share, therefore making it much more capital efficient. It also offers significant returns but can also result in significant losses if the market moves against your posicon Provide an opportunity to protect and hedge share poraolios.