Contract for difference

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A CFD ( contract for difference english, short CFD) is a form of total return swaps. Here, two parties agree to exchange value and the proceeds of an underlying interest rate payments during the term. He reflects thus the leveraged performance of the underlying basic value.

Contracts for Difference belong to the group of derivative financial instruments. They are highly speculative instruments for which there is a risk of total loss of your initial investment and funding obligations.

History

Contracts for difference are originally from investment banking. In the 1980s, they were developed at UBS in London, to get around the UK stamp duty. This provided for a state tax of 0.5% for each stock transaction on the London Stock Exchange. However, the design of contracts for difference allowed a OTC trading directly with the seller, whereby the control could be circumvented. As an OTC ( over-the -counter ) or non-exchange traded contracts for difference products today are significantly less regulated than publicly traded securities.

In the U.S., CFDs, however, are prohibited under the rules of the regulatory authority Securities and Exchange Commisson (SEC).

Operation

With contracts for difference investors to take on both rising and falling prices of the underlying asset (see also Long and Short). The investor thus not the underlying asset (underlying ) itself, but merely its price and exchange rate changes. CFDs themselves have no nominal value.

When trading CFDs a collateral (margin ) must be deposited on the underlying position, because the provider and market maker is exposed to the credit risk of the investor. Since these margin accounts for only a small part of the actual value of the underlying asset, there is a "multiplier effect " ( leverage). Brokers usually offer a choice for the lever between 5:1 to 100:1. Computationally will open a position with the purchase of contracts for difference. It is closed with the virtual purchase or sell an underlying asset, with only the difference compensation is calculated. The gains and losses arise by the purchased / sold CFD contracts are multiplied by the differential compensation.

Costs

When trading CFDs following charges may apply:

• Transaction costs including eg trading fees and the bid-ask spread,
• Account management fees,
• Financing costs when long positions are held overnight as it is a leveraged business.

The cost data in CFDs related to the leveraged total amount. In a comparison of the CFD Brokers Onvista of German providers of August 2009, the security was dependent on underlying provider and between 0.5 to 100 %, the cost of financing at 0 to 12%, p. a (premium or discount to the market interest rate ) and the Committees with up to 0.2 %. In terms of the bailout, ongoing financing costs then up to 2400 % p. a

Risks

Because CFDs are leveraged transactions usually, there are risks over the total loss of the use of addition: If the account does not have enough free cash available to provide security in the full amount, the position is closed. By price jumps can occur, however, that the position at a price beyond the guarantee shall be closed. Then, the investor must still nachschießen money on his deposit capital also.

In the off-exchange trading in contracts for difference the quoted prices can therefore - possibly even to the detriment of the customer - different from those in the reference market. This has the potential to trigger orders from customers at a much higher exchange rate, in order to acquire with an increased profit margin of an offsetting transaction.

Compared to certificates and warrants the credit risk with the seller through the legal deposit insurance is partially hedged for private investors with contracts for difference.

Criticism

Because of the high risk of loss criticize the European supervisory authorities for securities and banks these derivatives as highly speculative and advise inexperienced especially small and private investors from doing so.

As part of the insolvency of the CFD Brokers FXdirekt among other things discussed the ARD Exchange Portal and the Business Week the seriousness of this type of investment. Have FXdirekt customers except downright; there should be more black sheep and outsiders could not recognize the many gray areas even more. BaFin and the prosecutor were so overwhelmed to detect the rogue behavior. Attorney Bernhard English had answered ads by customers against the broker, if it were approved regulatory activities, but basically could similarly as in licensed gambling in the long run only on the part of bank profits. In the Compensatory Fund of Securities Trading Companies January 22, 2013 is the settlement of compensation cases for creditors, which is up to 20,000 € per person. The stock market portal ARD asked the question, how ever the white sheep could be found, and drew the conclusion, savers and investors should take away from it.

Even before the unregulated trade had been criticized. FXdirekt therefore offered since spring 2009 until its bankruptcy in late 2012 in cooperation with the Bavarian Stock Exchange a monitored trading with CFDs. But this offer was from the beginning in the criticism. It offered no trading, but consisted only of the subsequent delivery of courses of ordinary OTC CFD trading to employees of the trade monitoring the Bavarian Stock Exchange, also for an extra fee.

Tax Treatment

In Germany since the beginning of 2009 there are also all profits from CFDs under the Flat Tax ( Germany ). Until December 31, 2008 was for CFDs not the half-income method according to § 3 No. 40 Income Tax Act, but according to contracts they were subject to § 23 Section 1 No. 4 Income Tax Act.

Most of the shops but are operated by international CFD brokers, so that the legal account management is their headquarters outside Germany. In these cases, the investor must specify its profits on their own responsibility in his personal tax return. Gains and losses can be offset against this rule, so that only the actual winnings are taxed.

Demarcation on warrants, futures and lever certificates

Even with warrants and lever certificates underlying can be traded with high leverage. However, there are some key differences:

• Unlike warrants, the value of CFDs not depend on the maturity ( fair value) and volatility of the underlying. Only the change in price of the Underlying will affect the value of the CFDs.
• CFDs are unregulated derivatives and traded only on so-called "black pool " or OTC ( " over the counter" ), but not on exchanges. The other party (ie, broker or bank ) determines the courses for the customer, not supply and demand.
• Very similar but are leveraged certificates. Instead of a margin deposit, must be paid by the investor, the current security price. From the issuer doing a securities loan is granted. You can protect yourself by a knock-out level at which the certificate is worthless. A funding opportunity or obligation is not here.