# How safe are CFD providers from going bankrupt?



## jiggy (16 March 2008)

Has anyone thought how safe the likes of cmc, igmarkets etc are from this credit crisis. And what would happen to your money if they went bankrupt??


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## wayneL (16 March 2008)

Fanstastic question... and the reason those with big accounts (or even small account where that money is really important) should think very seriously about those questions.


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## hissho (17 March 2008)

so if those CFD providers went belly up, one would lose all the money in their account?

a bit scary but on the other hand i wonder if the government have policies in place so that customers would get compensated in case that happened? i guess so cos i remember there is such a mechanism in the States....otherwise nobody would have confidence and trades wouldnt be facilitated well...


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## Andy_aus (17 March 2008)

Would they run through those kind of scenarios with the PDS? Do they hedge all their positions?

Anyway ive learnt my lessons with market makers


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## tech/a (17 March 2008)

I was with a provider here in Australia and was told their UK operation had gone into liquidation.
So I requested my funds be returned to my nominated account.
This was carried out immediately and within 3 days had the funds.

Ive since had a look at how I can mitigate risk to the best of my ability.

(1) I'm changing provider now and will have 3
(2) Will have small amounts of funds in each.
(3) Will have funds in excess of start up capital transferred every week into my master account.

Evidently here in Australia funds must be kept in trust at arms length from the principal.
The theory is that they remain outside of any company issues.
DMA providers are at less risk due to immediately taking positions in the underlying.


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## tech/a (17 March 2008)

I noticed that Radge mentioned tha IB dont have any Australian stock available for shorts as of Friday night.

If so whats that say?
Other than the physical stock isnt available.


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## MichaelD (17 March 2008)

tech/a said:


> DMA providers are at less risk due to immediately taking positions in the underlying.




I don't see how this would mitigate the CFD provider's risk exposure at all.


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## prawn_86 (17 March 2008)

I would have thought that MM are safer from going belly up.

With a MM you are only buying a derivative of a share price. You dont own any underlying asset, so therefore the co doesnt either. Technically you are just buying a couple numbers here and there.

That said however, if more people won than lost they would be in trouble. I guess what they rely on comes back to a few dodgy tactics and the whole 95/5% things with only a few people being profitable


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## Timmy (17 March 2008)

Michael and Prawn,

I would have thought tech was right, that a DMA provider, by being fully hedged, would have less (basically no) exposure to market movements.  A MM DMA provider, on the other hand, who can choose to hedge or not to hedge may find him (or her)self unhedged during a big adverse move and therefore more exposed?  That would be my reasoning.


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## Trembling Hand (17 March 2008)

I have sent an email off to CMC to get them to answer the Q's about account protection. I remember reading something about it on their website years ago but it seems to have vanished. 

As for IB they have 1 mil cash insurance and 30 mil stock insurance per account. 
http://individuals.interactivebrokers.com/en/accounts/accountProtection.php?ib_entity=llc


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## MichaelD (17 March 2008)

DMA and MM - actual market exposure is irrelevant as their risk is that simply represented by the payment ability of the individual traders. The DMA has the added inconvenience of actually having to transact the trade, thus increasing costs to them.

If we accept that the vast bulk of CFD traders blow themselves up, then the actual risk to the CFD provider becomes the ability of the traders to pay their debts when they blow up/are margin called, not the risk of suddenly all traders being correct.


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## korrupt_1 (17 March 2008)

I got an Newsletter email from IG Markets on the 8th March. In it they wrote:



> As of 30 November 2007, on the latest published balance sheet IG Group had total assets of A$1.83 billion, no debt and own cash of A$240 million.




http://www.iggroup.com/

Large assests, no debts and +ve cash... sounds like they are going strong....


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## tech/a (17 March 2008)

MichaelD said:


> I don't see how this would mitigate the CFD provider's risk exposure at all.




Well in a couple of years time you will.

Sorry my humour couldnt resist!!


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## Kauri (17 March 2008)

a new player??? maybe..

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/17/cnbet117.xml


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## MichaelD (17 March 2008)

tech/a said:


> DMA providers are at less risk due to immediately taking positions in the underlying.




Originally Posted by MichaelD:
I don't see how this would mitigate the CFD provider's risk exposure at all.



			
				tech/a said:
			
		

> Well in a couple of years time you will.
> 
> Sorry my humour couldnt resist!!




So why exactly would DMA providers be at less risk?


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## tech/a (17 March 2008)

Michael

The risk for MM's isnt in my view from people going broke but more from the other side of the trade.
At 20:1 leverage they are exposed to the longside if enough trades are closed often enough with no underlying to liquidate and hedge.


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## Trembling Hand (17 March 2008)

tech/a said:


> The risk for MM's isnt in my view from people going broke but more from the other side of the trade.
> At 20:1 leverage they are exposed to the longside if enough trades are closed often enough with no underlying to liquidate and hedge.




I don't think MM hedge as much as people think they do. And as CFD traders have a happy knack of being on the wrong side of nasty moves they have probably more to win than lose from adverse market moves.


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## MichaelD (17 March 2008)

Trembling Hand said:


> I don't think MM hedge as much as people think they do.




I agree with this - I've seen no evidence of my MM CFD provider ever hedging my trades in the underlying market. Would be interested to know if anyone has any evidence one way or the other.

Undercapitalized traders = CFD traders = use all available leverage = take excess risk = cut profits short = let losses run = catch falling knives = guaranteed blow up.

Why hedge against losers? No hedging = no market risk.


To my mind, the two significant risks CFD providers are exposed to are;
1. Bad debtors (blown up traders)
2. No "fresh meat" (no new undercapitalized traders to blow up joining up)


2. would be the most significant risk


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## noident (19 March 2008)

I contacted MF Global with intention to open a CFD account.
Now I have already received a couple of calls from their rep who appears to be very, very eager to help me open an account. He's basically pushing me.
Possible signs of trouble? Opinions?


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## Trembling Hand (19 March 2008)

You Bet it is.



> MF Global Plunges on Concern Customers Pulling Funds (Update3)
> 
> By Matthew Leising and Jeff Kearns
> 
> March 17 (Bloomberg) -- MF Global Ltd., the largest broker of exchange-traded futures and options, fell 65 percent in New York trading on speculation clients were withdrawing cash. The company said its funding was ``sufficient.''


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## Kauri (20 March 2008)

Be carefull.... be very very carefull....   make sure you are not over-extended... anywhere...  

  :samurai:

*UK Telegraph* 
MF Global has informed clients that the margin on CFDs (Contract For Differences) for certain is up on stocks from 25% to 90%. The clients have been given until this morning to put up the extra cash or close positions. *The article states that traders fear the move could result in millions of shares being dumped on the market today*. FTSE 250 stocks and stocks popular with small investors are expected to be hardest hit, with observers warning that *other CFD providers - including IG Index and City Index - are also looking at increasing margins....*

  Cheers
............Kauri


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## chops_a_must (20 March 2008)

Kauri said:


> Be carefull.... be very very carefull....   make sure you are not over-extended... anywhere...
> 
> :samurai:
> 
> ...




I could/ can never work out if you actually traded cfd's, or the actual futures.

And because ordinary words can't get near the seriousness of all this:




> Rose, ability. There is no roseability
> Rose, ability. There is no roseability
> 
> You’ve got off with too much now
> ...


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## Timmy (20 March 2008)

noident said:


> I contacted MF Global with intention to open a CFD account.
> Now I have already received a couple of calls from their rep who appears to be very, very eager to help me open an account. He's basically pushing me.
> Possible signs of trouble? Opinions?




He is a broker, that's what they do.


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## So_Cynical (20 March 2008)

As i said months ago...the MM, CFD providers are just fancy "Bookies"


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## Markcoinoz (3 April 2008)

This is a slight side issue.

More to do with Mortgages.

However, what it is highlighting is the amount debt in both creditcards and margin loans.

In a recent 4 Corners Program called Debtland there was mention of the amount of Margin Lending that is taking place in comparison to our National Debt.

Rather staggering.  3.5% equal to creditcard debt.

There was no mention of the CFD market.

Very interesting program.

The problem that i think will continue to evolve is the compounded plastic debt on both Margin Loans and CFD's.

From what i have read if there is pressure in the overall level of debt, it will eventually have a ripple effect down to the CFD's.

Stands to reason if people are using borrowed funds for CFD's and Margin Lending the Mortgage Crisis looks like it has a long way to run and eventually funds will start to dry up with all types of leverages.

http://www.abc.net.au/4corners/content/2008/s2201740.htm

You can watch the program or read part of the transcript.

Cheers markcoinoz


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## Markcoinoz (21 April 2008)

This just further highlights my concerns of the CFD market.

If you operate CFD's i would suggest you read the fine print.

http://www.theaustralian.news.com.au/story/0,25197,23570606-643,00.html

Here is a snippet from the article.

The CFD industry estimates that more than $400 billion of CFD trades are carried out each year in Australia, representing more than 15 per cent of trades on the equities market. Most are trading outside the Australian Securities Exchange, in a poorly regulated over-the-counter market. The way it works is the CFD providers hedge their bets by either buying stock in the physical market or borrowing stock provided by superannuation funds.

Tom Elliott, managing director of Hedge fund group MM&E Capital, estimates that of the $200 billion stock that is available to be lent out, 10 per cent is carried out by the CFD industry, while hedge funds represent about 30 per cent.

According to the latest Australian Financial Markets Association data, the OTC market turned over $81.4 trillion last year, compared with $38.9 trillion for the total exchange-traded markets, which includes the ASX and the Sydney Futures Exchange, also owned by the ASX.

The country's biggest CFD provider, CMC markets, has in its product disclosure statement a clause: "Should there be a deficit in the segregated trust accounts and in the unlikely event CMC Markets becomes insolvent before it topped up the segregated trust account in deficit, you will be an unsecured creditor in relation to the balance of the moneys owing to you."

The second-biggest CFD provider, IG Markets, has in its product disclosure document: "Your money may be co-mingled into one or more separate accounts with our other customers' money; we are obliged to pay any money due to you in relation to dealings in CFDs into a separate account; the obligations to you under the Customer Agreement and the CFDs are unsecured obligations, meaning that you are an unsecured creditor of ours." 

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Well worth reading the entire article.

Cheers markcoinoz


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## Trembling Hand (21 April 2008)

Markcoinoz other than the product disclosure document info that article is rubbish. The CFD MM model is quite strong. Where are their risk coming from? Its not an adverse market movement as they will benefit from such a move its from customers winning excessively which is diminished by their hedging.


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