CFD Regulation - What can we expect

Recent events in the news

On June 16 the Central Bank of Ireland published the results of an investigation by CFD (Contracts for Difference) and financial firms spread betting. The research covered four companies and review the eighties, finding that none of the CFD providers inspected were fully compliant with the EU Markets in Financial Instruments.

The main findings were:

• Lack of information on customer knowledge and business experience gathered
• Evaluate whether the leveraged products such as CFDs are appropriate for the clients were inadequate or not performed
• marketing material outlining the risks and benefits of CFD are inaccurate
• disclosures of risk does not accurately convey the risks associated with CFDs

Head of Consumer Protection, Sharon Donnery, said "consumers should be aware of the complexity and high risks of CFD and financial spread betting before making investment decisions."

The current regulatory environment CFD

So how might this affect CFDs in the Asia and the Pacific?

Australia is the second largest market worldwide CFD, and despite the Australian Securities and Investments Commission (ASIC) requires that all riders over the counter for a licensed financial services, there are still concerns that the market is largely unregulated. CFD providers are awaiting the outcome of an ASIC consultation paper which already covers the concerns raised in the investigation of Ireland - the proposed restrictions on advertising and mandatory disclosure of the benchmarks of risk. ASIC has also moved to ban advertising on television CFD.

As a new regulation may be imminent, it is unlikely that the Central Bank of Ireland research have much effect on the region, but provides an indication of where regulation is directed CFD worldwide.

Managing the risks of CFDs

As CFD trading is largely unregulated, it is primarily the responsibility of the CFD trader to be informed of the risks involved in trading leveraged products.

Leveraged products, such as currencies and CFDs allow you to open a trade by paying a fraction of the value of the position is known as the margin. If a provider of CFD is a margin requirement of 5%, this means you can open a position of $ 20.000 for $ 1,000.

This increases your return on investment, but also increases their potential losses, which may exceed the original deposit.

Because of the risks of trade leveraged CFD providers offer a range of risk management tools, such as stop and limit orders. A stop order is when you set a level at which the trade is automatically closed if the market turn against you. This limits your losses if the market continues in that direction.

A limit order is when you set a level at which trade will be closed to take a certain amount of profits when the market moves in your favor. This protects their benefits if the market turns and wipes out your earnings potential.

However, the best way to manage risk is to be informed about the markets, control of open positions and establish limits on the amount of capital that is willing to lose. Good CFD provider should be able to provide information on risk management, and should accurately convey the risks of trading CFDs.