The million rand question – is CFD Trading Safe?
The trading activities of local brokerage firm Dealstream Securities (Pty) Ltdhave been restricted by its clearing member, Rand Merchant Bank (“RMB”). RMB has also assumed responsibility for the management of Dealstream’s open positions on the JSE. RMB has taken these steps in accordance with the JSE’s rules and as a result of Dealstream’s failure to meet its obligations in respect of transactions concluded on its proprietary account on the Financial Derivatives Division of the JSE.
Dealstream’s transactions on the JSE are limited to transactions concluded on its proprietary account as Dealstream does not have any clients registered on the JSE nor did Dealstream conclude transactions on the JSE on behalf of any clients.
Dealstream is one of South Africa’s largest Contracts For Differences (“CFD”) traders and, in this capacity, it has concluded many over-the-counter (“OTC”) CFD’s with its clients. CFD’s are not standardised agreements, and are, in essence, an over the counter contract between two parties (Dealstream and its client) stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at the expiry date stipulated in the CFD.
CFD’s have elements in common with derivatives instruments (such as single stock futures “SSF”) listed on the JSE but transactions in CFD’s are not regulated by the JSE nor do parties enjoy the protection of the JSE’s risk management and guarantee structures and procedures. Transactions in SSF’s listed on the JSE are regulated by the JSE and performance of the parties to the SSF is guaranteed in terms of the risk management structure as set out in the JSE’s rules. Investors who buy CFD contracts, on the other hand, take on the brokerage’s credit risk and can stand to lose if the CFD brokerage defaults.
An investor buying a single stock futures contract through SAFEX, will have to go through a clearing member who acts as a risk-manger and guarantees that the counterparty will honour its commitment to the deal.