ASIC surveillance after MF Global’s collapse has revealed a great concern within the OTC derivatives industry in that more than 30% of providers have failed to comply with client money laws. 

“After MF Global’s collapse it is disheartening to read that there are a large proportion of providers who are not complying with the most important procedure in running a company, the protection of client money,” said Andrew Merry, Managing Director, Capital CFDs. 

Section 981D of the Corporations Act states that client money held by OTC derivative licensee can be used for the purpose of meeting obligations in connection with margining, guaranteeing, securing, transferring, adjusting or settling dealings in derivatives by the licensee (including dealings on behalf of people other than the client). 

“When Capital CFDs came to Australia, we were stunned to find out that the Corporations Act allowed operators to use client funds to finance operational costs, which is clearly not in the interest of the client. We brought with us the UK practice of quarantining client monies and not using it for any operational purposes at all, including the hedging of client positions. I believe we are getting closer to having this standard applied across the industry with Treasury considering a change to the law,” said Merry.

 4 June 2012

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Since 2007, SMSFs have been allowed access to CFDs.  This change has given trustees a cost effective and efficient tool for hedging as opposed to traditional methods such as options. 

”If an SMSF holds 2,500 ANZ shares then an options hedging strategy would require 25 separate options contracts to be written (options over Australian shares are written in 100-share contracts). 

“Whereas, a single CFD trade could protect the ANZ shares on the downside, which is essential during market downturns such as recently when ANZ fell just over 12.5% in 13 days.  Instead of being exposed to a 12.5% drop in ANZ, an SMSF investor positioned via hedging, could have positioned themselves to limit that downside for minimal outlay. This explains the growth of CFD trading by SMSF’s trustees to ‘short’ their own portfolios to protect the value of the core portfolio in case of a market slide,” said Ashley Jessen, Head Sales Trader, Capital CFDs.

However, most CFD providers do not recommend SMSF trustees use their portfolio for principal trading or speculation via derivatives.  As opposed to using CFDs to speculate, smart investors can use them for risk protection measures and to reduce exposure to local stocks that have since fallen out of favour in the market. 

“Experienced investors who understand leverage and who are looking to use CFDs for risk protection are well advised to consider this technique further. Eurozone announcements that spook investors and drive markets down are all too common nowadays, so investors need to consider all the tools available to limit their downside and lock in profits” said Mr Jessen.

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Instead, consistently successful traders have a rock solid foundation that has been tailored to their own personal time frame and risk tolerance, thus removing the luck factor.

“The balance between winning and failing with CFD trading generally comes down to going into a position with a clear strategy, clearly defined exit points and strong money management systems. Only then will you get close to achieving your financial objectives and goals,” said Ashley Jessen, Capital CFDs.

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This is followed by (in order of most-traded):

• EUR/USD
• Gold
• Germany’s Dax 30 Index
• Australia’s 200 index

With over 2,500 products at trader’s disposal, Capital CFDs found that experienced and new traders alike seem to focus on currencies, commodities and indices as this is where the volatility is.

The greatest advantage among trading CFDs across the major Forex pairs, indices and commodities is free brokerage and access to extremely tight, fixed spreads.

“Traders using Capital CFDs in the 1st quarter of 2012, maintained their wide-eyed interest in trading currencies with 33% focused on the Aussie dollar and 16% jumping on board the Euro to hunt for volatility and short term gains.”

“Gold continued its relentless surge of volatility following Ben Bernanke offering grim hope of QE3 forcing Gold and other commodities to take a sharp nosedive,” said Ashley Jessen, Head of Sales Trading, Capital CFDs.

What to expect in 2nd quarter 2012?
“Moving forward, the focus for Capital CFD traders should continue to support a strong upside for US-based indices, more volatility from precious metals but a lack of trending opportunities.”

“We expect that there will be a steady grinding uptrend for the local Aussie index. It will be critical to keep a close eye on overhead resistance levels across all indices as they continue to show overbought levels following their incredibly bubbly start to 2012,” said Mr Jessen.

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