Norway proposes binary options ban and cfd restrictions
The UK financial regulator is planning to clamp down on the sale by spread betting companies of contracts for difference CFD and binary bet products to less experienced traders, including limiting leverage and preventing companies from attracting customers with special bonus introductory offers. In light of these high rate of losses, the watchdog said it had concerns that CFDs, a complex form of spread bet and rolling spot foreign exchange product often offered through online platforms, were being opened by retail customers who do not adequately understand them.
The FCA also said its research had revealed binary bets are "not transparent enough for investors to adequately value them, and have product features which are more akin to gambling products than investments", while Christopher Woolard, the FCA's executive director of strategy and competition, questioned "whether binary bets meet a genuine investment need".
He said the lack of adequate understanding of the risks involved in CFDs and binary bets often resulted in investors incurring "rapid, large and unexpected" losses. Last week the Cypriot regulator CySEC, which oversees a large number of spread betting operators who use the passporting rights conveyed by this license to trade in the EU, moved to restrict leverage and bonuses. This adds to what a rising wave of regulation in the industry, said analyst Jonathan Goslin at Numiswith France planning to ban all digital advertising of CFDs, Belgium having banned CFD norway proposes binary options ban and cfd restrictions, the Netherlands norway proposes binary options ban and cfd restrictions whether it will follow France and ban the advertising of CFDs, while Germany has said it could "intervene" shortly.
Some levels of leverage currently offered to retail customers exceed The FCA's consultation on the proposals will end on 7 March next year, with the timeline on implementation to be clarified soon after. In a statement released mid-morning on Tuesday, IG acknowledged there were shortcomings in the approach to the marketing of CFDs and binaries "by certain firms, often operating from outside the UK" and stressed its own "highest standards in the industry", saying its initial view was that certain of the FCA proposals "could enhance client outcomes".
It noted, however, "that the FCA's proposals do not appear to directly apply to firms operating from outside the UK offering CFDs and binaries to clients in the UK on a cross-border services passport from another EU member state". Analyst Paul McGinnis at broker Shore Capital pointed out that IG and CMC "typically operate at the higher end of the market in terms of average revenue per client - implying clients with greater understanding of the products - and would therefore be less impacted in relative terms.
However, the rapid growth seen in leveraged trading in recent years has clearly got onto the radar of regulators which may moderate the growth in new clients going forward.
While the quantum of the impact is very difficult to determine, we believe the companies will experience share price reactions as a result of souring sentiment, derating and a likely negative impact to forecasted growth," Norway proposes binary options ban and cfd restrictions said. He said he believed the majority of the regulation being discussed or implemented has been targeted at the lower quality end of the market "i.
Plus and below", which was "long overdue" but was "likely to have a material impact, at least in the near to medium-term, on CMC's growth and profitability across the UK norway proposes binary options ban and cfd restrictions Europe".
On IG, he said: It should however increase a customer's trading life span which will support longer term revenue growth. IG Group Holdings Plus Ltd DI 1, London Capital Group Holdings 0.
The new measures proposed by the FCA include: Reaction In a statement released mid-morning on Tuesday, IG acknowledged there were shortcomings in the approach to the marketing of CFDs and binaries "by certain firms, often operating from outside the UK" and stressed its own "highest standards in the industry", saying its initial view was that certain of the FCA proposals "could enhance client outcomes".
In finance, a contract for difference CFD is a contract between two parties, typically norway proposes binary options ban and cfd restrictions as "buyer" and "seller", norway proposes binary options ban and cfd restrictions that the seller will pay to the buyer the difference between the current value of an asset and its value norway proposes binary options ban and cfd restrictions contract time if the difference is negative, then the buyer pays instead to the seller.
In effect, CFDs are financial derivatives that allow traders to take advantage of prices moving up long positions or prices moving down short positions on underlying financial instruments. They are often used to speculate on those markets. For example, when applied to equities, such a contract is an equity derivative that allows traders to speculate on share price movements, without the need for ownership of the underlying shares.
CFDs may be traded as stocksbondsfuturescommoditiesindicesor currencies. They are not permitted in a number of other countries — most notably the United States, where, due to rules about over the counter products, CFDs cannot be traded by retail investors unless on a registered exchange and there are no exchanges in the US that offer CFDs. CFDs were originally developed in the early s in London as a type of equity swap that was traded on margin. They were initially used by hedge funds and institutional traders to cost-effectively hedge their exposure to stocks on the London Stock Exchangemainly because they required only a small margin and because no physical shares changed hands avoided the UK transaction tax known as stamp duty.
In the late s CFDs were introduced to retail traders. They were popularized by a number of UK companies, characterized by innovative online trading platforms that made it easy to see live prices and trade in real time. Aroundretail traders realized that the real benefit of trading CFDs was not the exemption from tax but the ability to leverage any underlying instrument.
This was the start of the growth phase in the use of CFDs. Trading index CFDs, such as the ones based on the major global indexes e. In the UK the CFD market mirrors the financial spread betting market and the products are in many ways the same. However unlike CFDs, which have been exported to a number of different countries, spread betting, inasmuch as it relies on a norway proposes binary options ban and cfd restrictions tax advantage, has remained primarily a UK and Irish phenomenon.
As a result, a small percentage of CFDs were traded through the Australian exchange during this period. The advantages and disadvantages of having an exchange traded CFD were similar for most financial products and meant reducing counterparty risk and increasing transparency but costs were higher. In OctoberLCH. Within Europe, any provider based in any member country can offer the products to all member countries under MiFID and many of the European financial regulators responded with new rules on CFDs after the warning.
The majority of providers are based in either Cyprus or the UK and both countries' financial regulators were first to respond. CySEC the Cyprus financial regulator, where many of the firms are registered, increased the regulations on Norway proposes binary options ban and cfd restrictions by limiting norway proposes binary options ban and cfd restrictions maximum leverage to The main risk is market riskas contract for difference trading is designed to pay the difference between the opening price and the closing price of the underlying asset.
CFDs are traded on margin, and the leveraging effect of this increases the risk significantly. It is this very risk that drives the use of CFDs, either to speculate on movements in financial markets or to hedge existing positions in other products.
Users typically deposit an amount of money with the CFD provider to cover the margin and can lose much more than this deposit if the market moves against them.
If prices move against open CFD position additional variation margin is required to maintain the margin level. The CFD provider may call upon the party to deposit additional sums to cover this, and in fast moving markets this may be at short notice. Counterparty risk is associated with the financial stability or solvency of the counterparty to a contract.
In the context of CFD contracts, if the counterparty to a contract fails to meet their financial obligations, the CFD may have little or no value regardless of the underlying instrument. This means that a CFD trader could potentially incur severe losses, even if the underlying instrument moves in the desired direction.
OTC CFD providers are required to norway proposes binary options ban and cfd restrictions client funds protecting client balances in event of company default, but cases such as that of MF Global remind us that guarantees can be broken.
Exchange-traded contracts traded through a clearing house are generally believed to have less counterparty risk. Ultimately, the degree of norway proposes binary options ban and cfd restrictions risk is defined by the credit risk of the counterparty, including the clearing house if applicable.
There are a number of different financial instruments that have been used in the past to speculate on financial markets. These range from trading in physical shares either directly or via margin lending, to using derivatives such as futures, options or covered warrants. A number of brokers have been actively promoting CFDs as alternatives to all of these products. The CFD market most resembles the futures and options market, the major differences being: Professionals prefer futures for indices and interest rate trading over CFDs as they are a mature product and are exchange traded.
The main advantages of CFDs, compared to futures, is that contract sizes are smaller making it more accessible for small trader and pricing is more transparent. Futures contracts tend to only converge near to the expiry date compared to the price of the underlying instrument which does not occur on the CFD as it never expires and simply mirrors the underlying instrument.
Futures are often used by the CFD providers to hedge their own positions and many CFDs are written over futures as futures prices are easily obtainable.
The industry practice is for the CFD provider to ' roll ' the CFD position to the next future period when the liquidity norway proposes binary options ban and cfd restrictions to dry in the last few days before expiry, thus creating a rolling CFD contract.
Optionslike futures, are an established product that are exchange traded, centrally cleared and used by professionals. Options, like futures, can be used to hedge risk or to take on risk to speculate. CFDs are only comparable in the latter case. An important disadvantage is that a CFD cannot be allowed to lapse, unlike an option.
This means that the downside risk of a CFD is unlimited, whereas the most that can be lost on an option is the price of the option itself.
In addition, no margin calls are made on options if the market moves against the trader. Compared to CFDs, option pricing is complex and has price decay when nearing expiry while CFDs prices simply mirror norway proposes binary options ban and cfd restrictions underlying instrument.
CFDs cannot be used to reduce risk in the way that options can. Similar to options, covered warrants have become popular in recent years as a way of speculating cheaply on market movements. CFDs costs tend to be lower for short periods and have a much wider range of underlying products. In markets such as Singapore, some brokers have been heavily promoting CFDs as alternatives to covered warrants, and may have been partially responsible for the decline in volume of covered warrant there.
This is the traditional way to trade financial markets, this requires a relationship with a broker in each country, require paying broker fees and commissions and dealing with settlement process for that product. With the advent of discount brokers, this has become easier and cheaper, but can still be challenging for retail traders particularly if trading in overseas markets. Without leverage this is capital intensive as all positions have to be fully funded.
CFDs make it much easier to access global markets for much lower costs and much easier to move in and out of a position quickly. All forms of margin trading involve financing costs, in effect the cost of borrowing the money for the whole position.
Margin lendingalso known as margin buying or leveraged equitieshave all the same attributes as physical shares discussed earlier, but with the addition of leverage, which means like CFDs, futures, and options much less capital is required, but risks are increased.
The main benefits of CFD versus margin lending are that there are more underlying products, the margin rates are lower, and it is easy to go short. Even with the recent bans on short selling, CFD providers who have been able to hedge their book in other ways have allowed clients to continue to short sell those stocks.
Some financial commentators and norway proposes binary options ban and cfd restrictions have expressed concern about the way that CFDs are marketed at new and inexperienced traders by the CFD providers.
In particular the way that the potential gains are advertised in a way that may not fully explain the risks involved. For example, the UK FSA rules for CFD providers include that they must assess the suitability of CFDs for each new client based on their experience and must provide a risk warning document to all new clients, based on a general template devised by the FSA.
The Australian financial regulator ASIC on its trader information site suggests that trading CFDs is riskier than gambling on horses or going to a casino. There has also been concern that CFDs are little more than gambling implying that most traders lose money trading CFDs. There has also been some concern that CFD trading lacks transparency as it happens primarily over-the-counter and that there is no standard contract.
This has led some to suggest that CFD providers could exploit their clients. This topic appears regularly on trading forums, in particular when it comes to rules around executing stops, and liquidating positions in margin call.
Although the incidence of these types of discussions may be due to traders' psychology where it is hard to internalise a losing trade and instead they try to find external norway proposes binary options ban and cfd restrictions to blame.
This is also something that the Australian Securities Exchange, promoting their Australian exchange traded CFD and some of the CFD providers, promoting direct market access products, have used to support their particular offering.
They argue that their offering reduces this particular risk in some way. If there were issues with one provider, clients could easily switch to another. Some of the criticism surrounding CFD trading is connected with the CFD brokers' unwillingness to inform their users about the psychology involved in this kind of high-risk trading.
Factors such as the fear of losing that translates into neutral and even losing positions  become a reality when the users change from a demonstration account to the real one. This fact is not documented by the majority of CFD brokers. Criticism has also been expressed about the way that some CFD providers hedge their own exposure and the conflict of interest that this could cause when they define the terms under which the CFD is traded.
One article suggested that some CFD providers had been running positions against their clients based on client profiles, in the expectation that those clients would lose, and that this created a conflict of interest for the providers.
A number of providers have begun offering CFDs tied to cryptocurrencies. The volatility of the cryptocurrency markets and the leverage of CFDs has norway proposes binary options ban and cfd restrictions a step too far in some cases with Coindesk  reporting that UK based Trading was forced to suspend trading of Bitcoin Cash CFDs in November resulting in significant losses for some clients when trading recommenced and the market had moved against them.
CFDs, when offered by providers under the market maker model, have been compared  to the bets sold by bucket shopswhich flourished in the United States at the turn of the 20th century. These allowed speculators to place highly leveraged bets on stocks generally not backed or norway proposes binary options ban and cfd restrictions by actual trades on an exchange, so the speculator was in effect betting against the house.
Bucket shops, colourfully described in Jesse Livermore 's semi-autobiographical Reminiscences of a Stock Operatorare illegal in the United States according to criminal as well as securities law. From Wikipedia, the free encyclopedia. This section possibly contains original research. Please improve it by verifying the claims made and adding inline citations. Statements consisting only of original research should be removed. October Learn how and when to remove this template message.
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