Contract for difference

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A contract for difference ( english contract for difference , short CFD ) is a form of total return swaps . Here, two parties agree to exchange the performance and income of an underlying for interest payments during the term. It thus reflects the (mostly heavily leveraged) price development of the underlying asset. A deposited security deposit ( margin ) is required.

Contracts for difference belong to the group of derivative financial instruments . They serve on the one hand to hedge against exchange rate fluctuations, on the other hand they can be used speculatively, whereby the risk of u. U. there are considerable additional payment obligations. An obligation to make additional payments has only been excluded for private customers since August 10, 2017 by a ruling by BaFin . The exclusion of additional payments, however, forces the CFD trading platforms to immediately close open positions at the expense of the customer, in which the security deposited by the customer has been used up due to possibly only short-term price fluctuations. The risk of total loss increases accordingly.

history

Contracts for difference originally come from investment banking . In the 1980s, they were developed at UBS in London to avoid the UK stamp duty . This provided for a state levy of 0.5% for every share transaction on the London Stock Exchange . However, the construction of the Contracts for Difference allowed over-the-counter trading between two parties, which enabled the tax to be avoided.

As products traded over the counter , contracts for difference are still significantly less regulated and standardized than exchange-traded securities ; in the US, CFDs are prohibited under the rules of the Securities and Exchange Commission (SEC) .

functionality

In the case of a CFD, investors and providers ( market makers ) agree to exchange money and an underlying asset (share, foreign currency, crypto-money tokens, etc.) with each other at the beginning and end of the term . In the case of a "long" CFD, the buyer of the CFD receives, for example, a (virtual) share at the start time, while the provider receives money security from the buyer. At the end of the term of the CFD, the investor “sells” the share back to the provider at the current market price, whereby the exchange purchase price of the share presented at the beginning of the CFD term is deducted. The security deposited by the buyer will also be repaid. If the share has risen in the meantime, the buyer of a "long" CFD gains a corresponding price gain, otherwise he suffers a price loss. With the “short” CFD it is exactly the other way around: Here the CFD buyer has to deliver a virtual share to the provider at the beginning, which he then buys back later. Here the CFD buyer makes a profit if the price has fallen in the meantime.

Since the money security presented at the start of the contract for difference is usually much lower than the value of the real share, the investor trades with a corresponding leverage. For example, if the share in a long CFD has a value of 66 euros, but only one euro is deposited as security ( margin ), the initial leverage is 66 accordingly.If the share rises by only one euro during the term of the CFD, this corresponds to a price gain of (67 euros - 66 euros) / 66 euros = 1.5%. However, the CFD gains in value by one euro, corresponding to a profit of 100%. However, if the base price of the share falls by one euro, the investor loses all of his stake, i.e. 100%.

If the base price falls further, the investor has to make considerable additional contributions .

For private investors, most CFD providers meanwhile exclude the obligation to make additional contributions by automatically closing positions when the security has been used up. However, this increases the total risk of loss for the investor, as even short-term, purely temporary price fluctuations lead to the forced exit from a position held and thus to the total loss of the security used.

With contracts for difference investors can bet on rising as well as falling prices (see also long and short positions ). In contrast to futures , contracts for difference have no standardized term or contract size and can be freely negotiated by the counterparties . There is therefore an even greater risk than with standardized forms of investment (bonds, stocks, warrants) that the investor does not understand the exact conditions and therefore makes investment decisions that are unfavorable for him. Clearly designed trading software and apps from numerous brokers make it easy for investment newbies to get started, 90% of which fail.

costs

The following costs can arise when trading CFDs:

The cost details for CFDs refer to the leveraged total amount. In a comparison of the CFD broker Onvista of German providers from August 2009, the security deposit was between 0.5 and 100 percent, depending on the underlying and the provider, the financing costs between 0 and 12 percent pa (surcharge or discount compared to the capital market interest rate) and the commissions at up to 0.2 percent. In relation to the security deposit, the ongoing financing costs were then up to 2,400 percent pa

Risks

Since CFDs are usually leveraged transactions , very high losses can arise in a short time, which can even go far beyond the initial use. Even if a broker automatically closes positions where the security has been used up, there is a risk that the closing will happen just at a time when the underlying asset is making extreme price jumps on the stock exchanges, and the actual exit deal will turn into a much worse one Course is billed as the respective stop rate. Then you have the investors of his deposit cash out any money nachschießen .

In over-the-counter trading in Contracts for Difference, the prices quoted can therefore differ from those on the reference exchange - also to the detriment of the customer. This has the potential to trigger orders from customers at a much less favorable rate, in order to enter into a counter-deal with a higher profit margin.

CFD brokers are required to keep customer funds and their own funds in separate accounts, so that the disbursement of customer funds would be secured even in the event of bankruptcy. However, many CFD brokers do not or only partially secure themselves with compensation transactions on the real stock exchange. This creates the danger that some major customers or a group of smaller customers successfully against the CFD broker bets and that on the part of customer funds into credit exposure device.

criticism

Because of the high risk of loss, the European supervisory authorities for securities and banks criticize these derivatives as highly speculative and advise inexperienced small and private investors against them.

In the context of the insolvency of the CFD broker FXdirekt , the ARD stock exchange portal and Wirtschaftswoche discussed the seriousness of this type of investment. BaFin and the public prosecutor's office are overwhelmed with proving the dubious behavior. Chief Public Prosecutor Bernhard Englisch had responded to advertisements from customers against the broker that it was a matter of activities approved by the supervisory authority, which, however, basically, similar to licensed gambling, could only lead to profits for the bank in the long term. The compensation scheme of the securities trading company has been processing compensation cases for creditors, up to € 20,000 per person, since January 22, 2013. The ARD stock exchange portal asked how the white sheep could be found and concluded that savers and investors should keep their hands off it.

The unregulated trade had been criticized before. From spring 2009 until its bankruptcy at the end of 2012, FXdirekt therefore offered monitored trading in CFDs in cooperation with the Bavarian Stock Exchange. But this offer was also criticized from the start. It did not offer any exchange trading, but merely consisted of the subsequent dispatch of prices from the usual over-the-counter CFD trading to employees of the trading supervision of the Bavarian Stock Exchange, also for an additional fee.

Tax treatment

In Germany, all profits from CFDs have been subject to the withholding tax since the beginning of 2009 . Up until December 31, 2008, CFDs were not subject to the half-income method according to Section 3 No. 40 EStG , but rather, according to forward transactions, they were subject to Section 23 Paragraph 1 No. 4 EStG.

Most of the time, the business is operated by international CFD brokers, so the legal account management is in their headquarters outside Germany. In these cases, the investor is responsible for declaring his profits in his personal tax return . Profits and losses can usually be offset, so that only the actual profits are taxed.

Differentiation from warrants, futures and leverage certificates

Underlyings can also be traded with high leverage with warrants , futures and leverage certificates . However, there are a few key differences:

  • In contrast to CFDs, the value of warrants does not only depend on the current price, but also on the remaining term and volatility of the underlying asset . The latter indicate the chance / risk that the underlying will continue to rise / fall over time up to the option date. As a result, warrants do not immediately lose their full value if the agreed subscription price of the underlying is temporarily undershot (call option) or the agreed sales price is temporarily exceeded (put option).
  • The warrant only becomes worthless if the price of the underlying instrument is still below (call option) or above (put option) the agreed reference price at the agreed time of redemption. However, there are then no obligation to make additional contributions, because in this case the option is not automatically executed.
  • Futures or futures contracts agree on the right and the obligation to buy or deliver a certain commodity (coal, oil, iron, electricity etc.) or an asset (shares, foreign exchange etc.) at a predetermined price on a certain date. In order to hedge against price fluctuations or fluctuations in value, private investors must also deposit appropriate collateral with the broker as margin for futures, so that the leverage is correspondingly large with small collateral. If the price fluctuations become too strong, similar to CFDs, additional payment obligations and / or the automatic closing of positions (knock-out) arise. Unlike CFDs, however, futures are traded on the stock exchange, so that a corresponding expected price is formed between the providers of a good and those who buy a good, which also reflects the usual price fluctuations. For example, wheat is i at the end of winter. d. Usually more expensive than shortly after the harvest in autumn.
  • In contrast to options and futures, CFDs are unregulated derivatives and are only traded via so-called "black pools" or OTC ("over the counter"), but not on stock exchanges. The counterparty (i.e. broker or bank) determines the prices for the customer, not supply and demand .
  • However, leverage certificates are very similar to CFDs. Instead of depositing a margin , the investor has to pay the current security price. However, this is partly financed by the issuer through a securities loan. In return, the issuer protects itself with a knock-out barrier that makes the certificate worthless. There is no possibility or obligation to make additional contributions.

See also

Individual evidence

  1. ↑ Carol Alexander: Market Risk Analysis, Volume III, Pricing, Hedging and Trading Financial Instruments. John Wiley & Sons., 2008, ISBN 978-0-470-77281-2 , pp. 40f
  2. ↑ General decree in accordance with Section 4b (1) WpHG with regard to Contracts for Difference (CFDs). In: Federal Financial Supervisory Authority. May 8, 2017. Retrieved September 21, 2019 .
  3. ↑ Stefan O. Waldvogel: CFD: The lever makes the difference. In: Bilanz.ch. Ringier Axel Springer Schweiz AG, August 23, 2005, accessed on September 21, 2019 .
  4. ↑ SEC Complaint. In: sec.gov. Securities and exchange commission, September 27, 2018, accessed on September 21, 2019 .
  5. ^ R. Venkata Subramani: Accounting for Investments: Equities, Futures and Options. 2009, John Wiley & Sons, ISBN 978-0470824313 , pp. 419ff
  6. ↑ a b Alexander Demling, Anne Seith: Personal bankruptcy through the release of francs: 2800 euros stake, 280,000 euros loss . In: Spiegel Online . March 19, 2015 ( spiegel.de [accessed December 29, 2017]).
  7. ↑ FOCUS Online: Because of luck . In: FOCUS Online . ( focus.de [accessed on December 29, 2017] Quote: "As is so often the case on the stock exchange, the problem is not CFDs per se, but the investor himself. Lured by promising advertising slogans, some dubious CFD providers said in the past Especially CFD beginners, now finally to be able to earn big money. You put everything on one card, with full risk and without a plan. ").
  8. ↑ FOCUS Online: Because of luck . In: FOCUS Online . ( focus.de [accessed on December 29, 2017] Quote: "And thirdly, the experience of many brokers and online banks shows that after a year around 90 percent of CFD accounts with an account balance close to zero euros are closed again.") .
  9. ↑ a b Annina Reimann: Insiders unpack: The dubious deals of FXdirekt Bank. Retrieved September 21, 2019 .
  10. ↑ Rechts-im-Internet.de: EAEG §1, §2, §3, §4
  11. ↑ boerse.ARD.de: Quantum leap in the CFD universe ( Memento of the original from July 29, 2013 in the Internet Archive ) Info: The @1@ 2Template: Webachiv / IABot / boerse.ard.de archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. , accessed May 24, 2013.
  12. ↑ Stiftung Warentest: Contracts for Difference - Only suitable for gamers - Stiftung Warentest. Retrieved September 21, 2019 .
  13. ↑ a b c Archived copy ( memento of the original from January 22, 2018 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. @1@ 2Template: Webachiv / IABot / boerse.ard.de
  14. ↑ Annina Reimann: FXDirekt: How online broker FXdirekt kicks off customers. Retrieved September 21, 2019 .
  15. ^ Bavarian Stock Exchange: History , accessed on October 28, 2012
  16. ↑ Jens Castner: Exchange of a different kind. In: finanzen.net. May 16, 2009, accessed September 21, 2019 .
  17. ↑ Annina Reimann: FXDirekt: How online broker FXdirekt kicks off customers. Retrieved September 21, 2019 .
  18. ↑ Withholding tax: Do CFDs generally fall under the withholding tax obligation? Retrieved July 24, 2013 .

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