Regulators sound warning bell over hidden CFD dangers

Regulators in Europe have issued a warning to retail investors about the dangers of investing in contracts for difference (CFD).

The European Securities and Markets Authority and European Banking Authority are concerned inexperienced retail investors across Europe are being tempted to invest in complex financial products amid the current period of low rates and investment returns.

The two bodies said they are worried investors are piling into CFDs, which ‘they may not fully understand and which can end up costing them money they cannot afford to lose.’

Steven Maijoor and Andrea Enria, the two chairs of the respective bodies, said: ‘Retail investors across the EU should be aware of all the risks arising from investing in CFDs. 

‘These products appear to promise investors substantial returns at a low cost but may ultimately cost them far more than they may have intended or could afford to lose.'

The added: ‘CFDs are complex products that are not suitable for all types of investors, therefore you should always make sure that you understand how the product you are buying works, that it does what you want it to do and that you are in a position to take the loss if it fails.’

The two bodies said investors should only consider trading in CFDs if they have extensive experience of trading in volatile markets, if they fully understand how they operate and have sufficient time to manage their investment on an active basis.

Esma and EBA said investors should at least understand the following:
•    the costs of trading CFDs with the CFD provider,  
•    whether the CFD provider will disclose the margins it makes on their trades,
•    how the prices of the CFDs are determined by the CFD provider,
•    what happens if they hold their position open overnight,  
•    whether the CFD provider can change or re-quote the price once an investor places an order,
•    whether the CFD provider will execute investor’s orders even if the underlying market is closed,
•    whether there is an investor or deposit protection scheme in place in the event of counterparty or client asset issues.