The Difference between Single
Stock Futures (SSF’s) and
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.
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 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.
No Rollover fees: As CFD’s do not expire
into a physical delivery no rollover fees are payable.
SSF’s (Single Stock Futures)
CFD’s (Contract for Difference)
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.
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
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.
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.
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 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.
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.
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/
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 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.
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.
