An Introduction to Contracts for Difference

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An Introduction to

Contracts for Difference

By: David Patten By: David Patten Director and

Director and Compliance OfficerCompliance Officer City Credit Capital (UK) Ltd. City Credit Capital (UK) Ltd. E

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Building

Labuan

_Labuan

Today, Asia accounts for a majority of GDP growth Today, Asia accounts for a majority of GDP growth

worldwide and most companies are focusing on moving worldwide and most companies are focusing on moving

in and setting up operations

in and setting up operations ‘‘locallylocally’’..

However, with proper exposure via the internet However, with proper exposure via the internet

Companies may bring the world to the individual. Companies may bring the world to the individual.

LOFSA can become a market leader by being the 1st LOFSA can become a market leader by being the 1st

Asian Financial Authority to recognize and regulate the Asian Financial Authority to recognize and regulate the

booming Contract For Difference (CFD) market. booming Contract For Difference (CFD) market.

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What are Contracts for Difference?

CFD

CFD –– a a contract contract between a client and broker to between a client and broker to exchange the

exchange the difference difference between the opening between the opening and closing price in cash only.

and closing price in cash only.

Markets Covered

Markets Covered –– any financial product any financial product

currently listed may form the basis of a CFD. currently listed may form the basis of a CFD.

CFD products

CFD products –– are traded based on ‘live’ are traded based on ‘live’

exchanges pricing but offer more flexibility than exchanges pricing but offer more flexibility than

traditional markets. traditional markets.

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History and Growth

Early 1970

Early 1970’’s s -- trading began trading began BBanksanks and Fund and Fund Managers would hedge open positions.

Managers would hedge open positions.

1997

1997 -- TThe Financial Services Authority (FSA) he Financial Services Authority (FSA) begins regulation of the CFD market as

begins regulation of the CFD market as individual investors enter market.

individual investors enter market.

Today, equity based CFD trading represent 40% Today, equity based CFD trading represent 40%

of the daily volume on the London Stock of the daily volume on the London Stock

Exchange (LSE). Exchange (LSE).

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Current Market Offering

City Credit Capital (UK) Ltd offers: City Credit Capital (UK) Ltd offers:

–

– Current Global MarketsCurrent Global Markets

DJI and NASDAQ equities DJI and NASDAQ equities

CBOT, CME and NYMEX futures CBOT, CME and NYMEX futures

All European equity markets (DAX, CAC, MLB, etc) All European equity markets (DAX, CAC, MLB, etc) Global Indices: HKSE, Nikkei, LSE, DJI and NASDAQ Global Indices: HKSE, Nikkei, LSE, DJI and NASDAQ Global FX markets

Global FX markets

These are just the begin

These are just the beginning of things to come as a ning of things to come as a single trading platform can offer global products.

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Benefits to Clients

Leverage

Leverage –– margin requirements are 5 margin requirements are 5 –– 20% of the 20% of the overall value of a trade.

overall value of a trade.

Diversification

Diversification –– a single client account can be used to a single client account can be used to trade

trade Global Global Equities, Commodities and Indexes. Equities, Commodities and Indexes.

Tax

Tax –– avoidance of Stamp Duty but clients must still pay avoidance of Stamp Duty but clients must still pay taxes on profitability.

taxes on profitability.

No Low Commissions

No Low Commissions –– most CFD contracts are traded most CFD contracts are traded on a commission free basis.

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Benefits to Brokers

Principle

Principle –– enables brokers to handle risk inenables brokers to handle risk in- -house.

house. Client orders maybe matched against Client orders maybe matched against other client orders to hedged in the market.

other client orders to hedged in the market.

Diversification

Diversification –– a single Broker may offer a single Broker may offer access to FX, Futures and Equity Markets. access to FX, Futures and Equity Markets.

Cost Savings

Cost Savings –– no Exchange fees, discounted no Exchange fees, discounted price feeds, centralized marketing and dealing price feeds, centralized marketing and dealing

staff. staff.

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Trading Example

Traditional Broker Traditional Broker Mr. X buys $50,000 of Microsoft Mr. X buys $50,000 of Microsoft @ 25.00 for a total of 2,000 @ 25.00 for a total of 2,000 shares. shares. Margin Requirement: $50,000 Margin Requirement: $50,000

He receives a dividend of .25 per He receives a dividend of .25 per share or $500 total.

share or $500 total.

The shares are then sold @ The shares are then sold @ 26.00 for a profit of $2,000. 26.00 for a profit of $2,000.

Considering a .25% commission Considering a .25% commission rate charges equal $125 or $250 rate charges equal $125 or $250 round turn. round turn. Profit: 500 + 2,000 Profit: 500 + 2,000 –– 250 = 250 = $2,250 $2,250 ROI: 2,250 / 50,000 = 4.5% ROI: 2,250 / 50,000 = 4.5% CFD Broker CFD Broker Mr. X buys $50,000 of Microsoft Mr. X buys $50,000 of Microsoft @ 25.00 for a total of 2,000 @ 25.00 for a total of 2,000 shares. shares. Margin Requirement: $5,000 Margin Requirement: $5,000

He receives a dividend of .25 per He receives a dividend of .25 per

share or $500 total. share or $500 total.

The shares are then sold @ The shares are then sold @

26.00 for a profit of $2,000. 26.00 for a profit of $2,000.

Considering a .25% commission Considering a .25% commission rate charges equal $125 or $250 rate charges equal $125 or $250

round turn. round turn. Profit: 500 + 2,000 Profit: 500 + 2,000 –– 250 = 250 = $2,250 $2,250 ROI: 2,250 / 5,000 = 45% ROI: 2,250 / 5,000 = 45%

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Current Trends

Since introducing CFD to the retail market in Since introducing CFD to the retail market in

1997 the market has doubled in size each year, 1997 the market has doubled in size each year,

today 40% of LSE volume! today 40% of LSE volume!

Today clients are more likely to handle their own Today clients are more likely to handle their own

portfolios than ever before due to online access portfolios than ever before due to online access

to markets and information. to markets and information.

Investors are moving from long term to short Investors are moving from long term to short

term investments as market volatility increases. term investments as market volatility increases.

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UK FSA

Regulation

_Regulation

There is little doubt that the UK Financial There is little doubt that the UK Financial

Services Authority is a world leader in regulation Services Authority is a world leader in regulation

policy. policy.

The FSA recognizes that its primary duty is to The FSA recognizes that its primary duty is to ensure the full faith and creditability of the UK ensure the full faith and creditability of the UK

financial system. financial system.

Know Your Customer (KYC) rules: are strictly Know Your Customer (KYC) rules: are strictly

enforced. All clients must submit a Financial enforced. All clients must submit a Financial Assessment and Product Assessment forms. Assessment and Product Assessment forms.

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UK FSA

Regulation

_Regulation

con

_con

’

_’

t

_t

If clients are from FATF (financial Action Task If clients are from FATF (financial Action Task

Force) compliant countries a passport and utility Force) compliant countries a passport and utility

bill must be provided to ensure identity. bill must be provided to ensure identity.

If clients are from non

If clients are from non--FATF compliant countries FATF compliant countries then ID and Proof of Address must be

then ID and Proof of Address must be notarizednotarized by a government official, bank or attorney.

by a government official, bank or attorney.

Anti

Anti--money Laundering (AML) further limits how money Laundering (AML) further limits how money may be deposited and withdrawn by

money may be deposited and withdrawn by clients.

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Further Restrictions and a

Guarantee

Due to the amount of leverage involved the UK has Due to the amount of leverage involved the UK has

chosen to restrict the CFD market to Intermediate chosen to restrict the CFD market to Intermediate or or

Expert

Expert Clients:Clients: –

– with a net worth of over $200,000.00 with a net worth of over $200,000.00 –

– 6 month derivatives or 2 years equity trading.6 month derivatives or 2 years equity trading.

Client funds are guaranteed by the FSA to100% of 1st Client funds are guaranteed by the FSA to100% of 1st

30,000 and 90% of next 20,000. 30,000 and 90% of next 20,000.

Even with the above restrictions the CFD market is Even with the above restrictions the CFD market is

booming with no sign slowing down. booming with no sign slowing down.

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Conclusion

The current generation is comfortable with the The current generation is comfortable with the

internet, online shopping, banking and internet, online shopping, banking and

brokerages services are all booming. brokerages services are all booming.

Physical location of online brokerage house is of Physical location of online brokerage house is of

little consideration provided all clients feel that little consideration provided all clients feel that

their funds are secure. their funds are secure.

Labuan

Labuan being in Asia and as a limited tax zone being in Asia and as a limited tax zone both clients and companies can benefit provided both clients and companies can benefit provided

LOFSA chooses to allow and regulate the CFD LOFSA chooses to allow and regulate the CFD

market. market.