There is a growing debate over the need for tighter Regulation on Over the Counter CFDs, as a protection measure for both buyers and sellers. Recent high profile legal precedents have sparked a wave of interest in the sector both from investors and the government authorities. The term CFD is a short name that represents Contract for the difference, which is a contract between two parties. Investors and traders are able to use Contracts for Difference to both speculate and to hedge risk on current holdings. Speculation on price action and volatility has become a popular trading method, with traders focusing on short term trade scenarios or models.
The price action on the financial market is calculated and determined by the use of trading platform provided to investors by their brokers. The trading platform used in trading the market differs from one broker to the other. Some of the commonly used platforms include Metatrader, IG Markets (Pure Trade) and CMC Markets. The CFD directive is now available in many developed countries including the United Kingdom, Australia and much of Asia. Many Asian nations including Hong Kong have taken the step recently of amending regulatory procedures and financial regulation to accommodate the growth in the industry. The regulatory bodies are focused on ensuring that each broker abides by the law, through the disclosure of risks associated and the adequate handling of complaints. Management of client expectations and assessment of risk is also a key aspect of the regulatory landscape..
The need for regulation of contract for difference is essential since the business is attracting a large investor base on a daily basis. In effect the regulation will provide new investors with the guarantee that they are trading in a secure and regulated environment. In the past counter party risk has weighed on traders’ minds. This however does not deter some brokers, who act outside the boundaries of the regulatory framework. At all times, a licensed broker should be used when trading the markets.
The CFD regulatory environment in the United States is completely different from the rest of the world, with the SEC banning the product. Many trading providers and brokerage houses have questioned the SEC’s judgement on the product, with a fierce debate over the freedom of financial choice. Some believe the law has deprived interested parties in trading a regulated and efficient financial product. Under US law, Contracts for Difference are banned and as such, any individual who resides in the US is not allowed to trade the product. Providers who take on US clients are breaking the local law and could be subject to harsh penalties or fines.