Editing Contract for difference (section)

==History==
===Invention===
Developed in Britain in 1974 as a way to leverage gold, modern CFDs have been trading widely since the early 1990s.<ref>{{cite web|last1=Fattouh|first1=Bassam|last2=Imsirovic|first2=Adi|date=1 June 2019|title=Contracts for Difference and the Evolution of the Brent Complex|url=https://www.oxfordenergy.org/wpcms/wp-content/uploads/2019/06/Contracts-for-Difference-and-the-Evolution-of-the-Brent-Complex.pdf|publisher=[[The Oxford Institute for Energy Studies]]|access-date=3 September 2024|archive-url=http://web.archive.org/web/20240903124533/https://www.oxfordenergy.org/wpcms/wp-content/uploads/2019/06/Contracts-for-Difference-and-the-Evolution-of-the-Brent-Complex.pdf|archive-date=3 September 2024}}</ref><ref name="It's a gamble either way">{{cite news|url=http://www.smh.com.au/news/business/money/investment/its-a-gamble-either-way/2009/09/02/1251570744263.html?page=fullpage#contentSwap5|title=It's a gamble either way|publisher=[[The Sydney Morning Herald]]|date=2 September 2009|author-first=Annette|author-last=Sampson|access-date=3 September 2024|archive-url=http://web.archive.org/web/20240903191009/https://www.smh.com.au/business/its-a-gamble-either-way-20090902-gdtpge.html?page=fullpage#contentSwap5|archive-date=3 September 2024}}</ref> CFDs were originally developed as a type of [[equity swap]] that was traded on [[margin (finance)|margin]]. The invention of the CFD is widely credited to Brian Keelan and Jon Wood, both of [[UBS Warburg]], on their [[Trafalgar House (company)|Trafalgar House]] deal in the early 1990s.<ref>{{cite book|title=Business knowledge for IT in prime brokerage : a complete handbook for IT professionals|date=2008|publisher=Essvale Corp|isbn=9781906096038|edition=1st|location=London|pages=89|oclc=727175393}}</ref><ref>{{cite news|url=https://www.thetimes.com/article/gadget-shop-deal-unmasks-the-citys-silent-trader-bjpf6tqg0kf|title=Gadget Shop deal unmasks the City's silent trader|first=Richard|last=Fletcher|date=20 March 2005|work=[[The Times]]|location=London|access-date=3 September 2024|url-access=subscription|url-status=live|archive-url=http://web.archive.org/web/20240903191721/https://www.thetimes.com/article/gadget-shop-deal-unmasks-the-citys-silent-trader-bjpf6tqg0kf|archive-date=3 September 2024}}</ref><ref name=":0">{{cite book|last=Elder|first=Alexander|title=The new trading for a living: psychology, discipline, trading tools and systems and risk control, trade management|date=27 October 2014|isbn=9781118443927|publisher=Wiley|location=[[Hoboken]], New Jersey|pages=186|oclc=903658661}}</ref>

===Asset management and synthetic prime brokerage===
CFDs were initially used by [[hedge fund]]s and institutional traders to cost-effectively gain an exposure to stocks on the [[London Stock Exchange]] (LSE), partly because they required only a small margin but also, since no physical shares changed hands, they also avoided [[stamp duty in the United Kingdom]]—trades by the prime broker for its own account, for hedging purposes, are exempt from [[stamp duty]].<ref>{{cite web | title=Derivatives: introduction to contracts for difference| website=GOV.UK|publisher=HM Revenue & Customs| date=10 May 2024| url=https://www.gov.uk/hmrc-internal-manuals/stamp-taxes-shares-manual/stsm118040|id=STSM118040}}</ref>

It remains common for hedge funds and other asset managers to use CFDs as an alternative to physical holdings (or physical [[Short-selling|short selling]]) for UK-listed equities, with similar risk and leverage profiles. A hedge fund's [[prime broker]] will act as the counterparty to CFD, and will often [[hedge (finance)|hedge]] its own risk under the CFD (or its net risk under all CFDs held by its clients, long and short) by trading physical shares on the exchange.

Institutional traders started to use CFDs to hedge stock exposure and avoid taxes. Several firms began marketing CFDs to retail traders in the late 1990s, stressing their leverage and tax-free status in the UK. A number of service providers expanded their products beyond the [[London Stock Exchange]] to include global stocks, commodities, bonds, and currencies. Index CFDs, which were based on key global indexes including the [[Dow Jones]], [[S&P 500]], [[FTSE 100 Index|FTSE]], and [[DAX]], immediately gained popularity.<ref name=":0"/>

===Retail trading===
In the late 1990s, CFDs were introduced to retail traders. They were popularized by a number of UK companies, characterized by innovative [[online trading platform]]s that made it easy to see live prices and trade in real-time. The first company to do this was GNI (originally known as Gerrard & National Intercommodities).

GNI provided retail stock traders with the opportunity to trade CFDs on LSE stocks through its innovative front-end [[electronic trading system]], GNI Touch, via a home computer connected to the Internet. GNI's retail service created the basis for retail stock traders to trade directly onto the Stock Exchange Electronic Trading Service (SETS) central limit order book at the LSE through a process known as [[direct market access]] (DMA). For example, if a retail trader sent an order to buy a stock CFD, GNI would sell the CFD to the trader and then buy the equivalent stock position from the marketplace as a full hedge.<ref name=":1">{{cite book|last=Norman|first=David J.|url=https://www.worldcat.org/oclc/921845679|title=CFDs : the definitive guide to contracts for difference|date=2009|isbn=978-0-85719-023-9|publisher=Harriman House|location=Petersfield|oclc=921845679}}</ref>

GNI and its CFD trading service GNI Touch was later acquired by [[MF Global]]. They were soon followed by [[IG Group|IG Markets]] and [[CMC Markets]], which started to popularize the service in 2000.<ref name=":1" /> Subsequently, European CFD providers such as [[Saxo Bank]] and Australian CFD providers such as [[Macquarie Group|Macquarie Bank]] and [[First Prudential Markets|Prudential]] made significant progress in establishing global CFD markets.

Around 2001, a number of the CFD providers realized that CFDs had the same economic effect as [[financial spread betting]] in the UK, except that spread betting profits<ref name=":2">{{cite news|last=Dunne|first=Eithne|title=Rookies roll the dice on high-risk trading|newspaper=[[The Times]]|url=https://www.thetimes.com/article/rookies-roll-the-dice-on-high-risk-trading-3xsqf20c8 |access-date=17 May 2022|issn=0140-0460}}</ref> were exempt from [[Capital gains tax in the United Kingdom|capital gains tax]]. Most CFD providers launched financial spread betting operations in parallel to their CFD offering. In the UK, the CFD market mirrors the financial spread betting market and the products are in many ways the same; the FCA defines spread betting as "a contract for differences that is a gaming contract".<ref>{{cite web|title=spread bet – FCA Handbook|url=https://www.handbook.fca.org.uk/handbook/glossary/G1118.html#|access-date=3 September 2024|website=[[Financial Conduct Authority]]|archive-url=http://web.archive.org/web/20240903192311/https://www.handbook.fca.org.uk/handbook/glossary/G1118.html|archive-date=3 September 2024}}</ref> However, unlike CFDs, which have been exported to a number of different countries, spread betting, which relies on a country-specific tax advantage, has remained primarily limited to the UK and Ireland.<ref name=":2"/>

CFD providers then started to expand to overseas markets, starting with Australia in July 2002 by [[IG Group|IG Markets]] (first CFD provider to be licensed by [[Australian Securities & Investments Commission#ASIC registers|ASIC]]) and [[CMC Markets]].<ref>{{cite journal|last=Skilton|first=David|title=Contracts for Difference – an Introduction for Planners|url=https://search.informit.org/doi/abs/10.3316/informit.974516750332488|journal=Australian Journal of Financial Planning|date=20 August 2020 |volume=3|issue=2|pages=45–48}}</ref> CFDs have since been introduced into a number of other countries. They are available in most European countries, as well as Australia, Canada, Israel, Japan, Singapore, South Africa, Turkey, and New Zealand, throughout South America and others. They are not permitted in a number of other countries – most notably the United States, where the [[Securities and Exchange Commission]] (SEC) and [[Commodity Futures Trading Commission]] (CFTC) prohibit CFDs from being listed on regulated exchanges and being traded on foreign or domestic trading platforms due to their high risk.<ref>{{cite web|title=The Laws That Govern the Securities Industry|url=https://www.sec.gov/answers/about-lawsshtml.html#secexact1934|publisher=U.S: Securities and Exchange Commission|date=1 October 2013}}</ref><ref>{{cite journal|last=Gazi|first=Sangita|date=26 November 2019|title=Reimagining a Centralized Cryptocurrency Regulation in the US: Looking through the Lens of Cryptoderivatives|url=https://papers.ssrn.com/abstract=3737947|location=Rochester, NY|doi=10.2139/ssrn.3737947|ssrn=3737947|s2cid=239435048|journal=[[Social Science Research Network]]|url-access=subscription}}</ref> At the same time, a number of trading apps with various usage scenarios operate on the market, including [[eToro]], [[Freetrade]], Fidelity Personal Investing (part of [[Fidelity Investments]]) and Trading212.<ref>{{cite web|last=Michael|first=Andrew|date=12 May 2022 |title=Best Investment Trading Apps UK 2022|url=https://www.forbes.com/uk/advisor/investing/best-investment-apps/|access-date=17 May 2022|editor=Pratt, Kevin|website=[[Forbes]] Advisor UK|archive-url=http://web.archive.org/web/20240903193224/https://www.forbes.com/uk/advisor/investing/best-investment-trading-apps-september-2024/|archive-date=3 September 2024}}</ref>

CFDs are treated as a gambling product in Hong Kong unless they have been permitted by the [[Securities and Futures Commission]] (SFC),<ref>{{Cite web|title=Hong Kong e-Legislation|url=https://www.elegislation.gov.hk/checkconfig/checkClientConfig.jsp?applicationId=RA001|access-date=2024-08-18|website=www.elegislation.gov.hk}}</ref> which treats CFDs, where the underlying is a security, as futures contracts, that must be exchange-traded, effectively precluding their being offered in Hong Kong. However, the SFC has a separate regulatory regime for rolling spot FX contracts, which it terms leverage foreign exchange contracts. These can be offered to retail clients as an over-the-counter derivative. Brokers in Hong Kong can also offer CFDs on the spot price of precious metals, which aren't regulated as securities, using prices derived from contracts trading on the [[Chinese Gold and Silver Exchange Society]].<ref>{{Cite web|date=2024-02-17|title=Is FX/CFD trading legal in Hong Kong? - TradeInformer|url=https://tradeinformer.com/fx-cfd-licensing/is-fx-cfd-trading-legal-in-hong-kong/|access-date=2024-08-18|language=en-US}}</ref>

In 2016 the [[European Securities and Markets Authority]] (ESMA) issued a warning on the sale of speculative products to retail investors that included the sale of CFDs.<ref name="auto">{{cite web|url=https://www.esma.europa.eu/press-news/esma-news/esma-issues-warning-sale-speculative-products-retail-investors|title=ESMA issues warning on sale of speculative products to retail investors|publisher=ESMA|date=25 July 2016}}</ref>

===Attempt by Australian exchange to move to exchange trading===
The majority of CFDs are traded [[Over-the-counter (finance)|OTC]] using the ''direct market access'' (DMA) or ''[[market maker]]'' model, but from 2007 until June 2014<ref>{{cite web|url=http://www.sfe.com.au/content/notices/2014/0231.14.03.pdf|archive-url=https://web.archive.org/web/20150123180859/http://www.sfe.com.au/content/notices/2014/0231.14.03.pdf|url-status=dead|title=ASX to cease offering CFDs|archive-date=23 January 2015}}</ref> the [[Australian Securities Exchange]] (ASX) offered exchange traded CFDs. As a result, a small percentage of CFDs were traded through the Australian exchange during this period.

The advantages and disadvantages of having an exchange traded CFD were similar for most financial products and meant reducing counterparty risk and increasing transparency but costs were higher. The disadvantages of the ASX exchange traded CFDs and lack of liquidity meant that most Australian traders opted for over-the-counter CFD providers

===Insider trading regulations===
In June 2009 the [[Financial Services Authority]] (FSA), the UK regulator, implemented a general disclosure regime for CFDs to avoid them being used in [[insider information]] cases.<ref>{{cite news|url=https://www.thetimes.com/business-money/companies/article/fsa-brings-forward-cfd-disclosure-rules-hxlr03g2jvk|title=FSA brings forward CFD disclosure rules|date=3 March 2009|author-first=Tom|author-last=Bawden|work=[[The Times]]|url-access=subscription|url-status=live|archive-url=http://web.archive.org/web/20240903194008/https://www.thetimes.com/article/fsa-brings-forward-cfd-disclosure-rules-hxlr03g2jvk|archive-date=3 September 2024}}</ref> This was after a number of high-profile cases where positions in CFDs were used instead of physical underlying stock to exempt them from the normal insider information disclosure rules.<ref>{{cite news|last=Griffiths|first=Katherine|url=https://www.telegraph.co.uk/finance/markets/2819429/FSA-calls-for-more-CFD-disclosure.html|title=FSA calls for more CFD Disclosure|publisher=[[The Daily Telegraph]]|date=13 November 2007|access-date=29 April 2010|location=[[London]]|archive-url=http://web.archive.org/web/20240903193535/https://www.telegraph.co.uk/finance/markets/2819429/FSA-calls-for-more-CFD-disclosure.html|archive-date=3 September 2024}}</ref>

===Attempt at central clearing===
In October 2013, [[LCH.Clearnet]] in partnership with [[Cantor Fitzgerald]], [[ING Bank]] and [[Commerzbank]] launched centrally cleared CFDs in line with the EU financial regulators' stated aim of increasing the proportion of cleared OTC contracts.<ref>{{cite press release|title=Investor protection improved with centrally cleared CFD launched in partnership with Commerzbank, ING and Citi|publisher=LCH.Clearnet|url=http://www.lchclearnet.com/media_centre/press_releases/2013-10-30.asp|url-status=dead|archive-url=https://web.archive.org/web/20131102211929/http://www.lchclearnet.com/media_centre/press_releases/2013-10-30.asp|archive-date=2 November 2013|date=30 October 2013}}</ref>

===European regulatory restrictions===
In 2016, the [[European Securities and Markets Authority]] (ESMA) issued a warning on the sale of speculative products to retail investors that included the sale of CFDs.<ref name="auto"/> This was after they observed an increase in the marketing of these products at the same time as a rise in the number of complaints from retail investors who have suffered significant losses. Within Europe, any provider based in any member country can offer the products to all member countries under [[MiFID]] and many of the European financial regulators responded with new rules on CFDs after the warning. The majority of providers are based in either Cyprus or the UK and both countries' financial regulators were first to respond. [[CySEC]] the Cyprus financial regulator, where many of the firms are registered, increased the regulations on CFDs by limiting the maximum leverage to 50:1 as well prohibiting the paying of bonuses as sales incentives in November 2016.<ref>{{cite news|url=https://www.financemagnates.com/forex/brokers/cysec-mandates-default-leverage-150-forex-cfds-kills-bonuses/|title=CySEC Mandates Default Leverage 1:50 for Forex and CFDs, Kills Bonuses|publisher=Finance Magnates|date=30 November 2016|author-first=Victor|author-last=Golovtchenko|access-date=3 September 2024|archive-url=http://web.archive.org/web/20240903194648/https://www.financemagnates.com/forex/brokers/cysec-mandates-default-leverage-150-forex-cfds-kills-bonuses/|archive-date=3 September 2024}}</ref> This was followed by the UK [[Financial Conduct Authority]] (FCA) issuing a proposal for similar restrictions on 6 December 2016.<ref name="fca3">{{cite press release|url=https://www.fca.org.uk/news/press-releases/fca-proposes-stricter-rules-contract-difference-products|url-status=live|title=FCA proposes stricter rules for contract for difference products|date=6 December 2016|publisher=[[Financial Conduct Authority]]|archive-url=http://web.archive.org/web/20240903194952/https://www.fca.org.uk/news/press-releases/fca-proposes-stricter-rules-contract-difference-products|archive-date=3 September 2024}}</ref> The FCA imposed further restrictions on 1 August 2019 for CFDs and 1 September 2019 for CFD-like options with the maximum leverage being 30:1.<ref>{{cite web|url=https://www.fca.org.uk/news/press-releases/fca-confirms-permanent-restrictions-sale-cfds-and-cfd-options-retail-consumers|title=FCA confirms permanent restrictions on the sale of CFDs and CFD-like options to retail consumers|date=28 June 2019|website=[[Financial Conduct Authority]]|access-date=1 July 2021|archive-url=http://web.archive.org/web/20240903195241/https://www.fca.org.uk/news/press-releases/fca-confirms-permanent-restrictions-sale-cfds-and-cfd-options-retail-consumers|archive-date=3 September 2024}}</ref> The German regulator [[BaFin]] took a different approach and in response to the ESMA warning prohibited additional payments when a client made losses. While the French regulator [[Autorité des marchés financiers (France)|Autorité des marchés financiers]] decided to ban all advertising of the CFDs.<ref>{{cite news|url=https://www.telegraph.co.uk/business/2017/01/09/ig-group-reassures-investors-french-cfd-crackdown/|title=IG Group reassures investors over French CfD crackdown|date=9 January 2017|publisher=[[The Daily Telegraph]]|author-first=Ben|author-last=Martin|access-date=3 September 2024|archive-url=http://web.archive.org/web/20240903195659/https://www.telegraph.co.uk/business/2017/01/09/ig-group-reassures-investors-french-cfd-crackdown/|archive-date=3 September 2024}}</ref> In March the [[Financial Regulator (Ireland)|Irish Financial Regulator]] followed suit and put out a proposal to either ban CFDs or implement limitations on leverage.<ref>{{cite news |url=http://www.leaprate.com/forex/regulations/ireland-looking-to-ban-leveraged-forex-and-cfd-trading-for-retail-clients/ |title=Ireland looking to ban leveraged Forex and CFD trading for retail clients|date=6 March 2017|publisher=LeapRate}}</ref> Beyond Europe, other regions have also set specific leverage limits. In Australia, the [[Australian Securities and Investments Commission]] (ASIC) has established leverage limits for retail CFD trading. In March 2021, ASIC reduced the maximum leverage ratio to 30:1.<ref>{{cite web|url=https://www.compareforexbrokers.com/cfd-trading/|title=Understanding CFD Trading|publisher=CompareForexBrokers|author-first=Justin|author-last=Grossbard|date=2 September 2024 |access-date=3 September 2024}}</ref><ref>{{cite web|url=https://www.financemagnates.com/forex/cmc-ig-and-more-7-cfds-brokers-violated-aussie-leverage-rules-returns-au43m/|title=CMC, IG and More: 7 CFDs Brokers Violated Aussie Leverage Rules, Returns AU$4.3M|date=9 November 2023|publisher=Finance Magnates|author-first=Arnab|author-last=Shome|access-date=3 September 2024}}</ref>