Since their introduction almost thirty years ago, CFDs have grown hugely in popularity and availability, and now include more asset classes and instruments than ever. Their unique advantages make them a favourite among many traders today, but CFDs haven’t always been so readily available to retail traders. The origins of CFDs date back to their use by hedge funds, but the immense trading possibilities they offered quickly made their way to the average trader. Here’s when, how, and why.
Early 1990s, London – CFDs are developed as a type of equity swap that utilises margin for trading it. The credit for this market-changing invention is generally given to Brian Keelan and Jon Wood, who were both at UBS Warburg at the time.
Given that they are securities and financial instruments with low costs, CFD contracts are originally used by hedge funds to cover financial positions in the London Stock Exchange, especially since they required relatively little margin and also bypassed the UK transaction tax (or stamp duty) since no actual physical shares were exchanged.
Entry into Retail
Late 1990s, UK – CFDs first become available to retail clients through a number of innovative UK-based brokers. Online trading platforms made it easy to get real-time price quotes and place immediate trades, and as technology advances so does the proliferation of CFDs.
The first company to offer CFDs to the public is GNI Touch, which is subsequently acquired by MF Global (now defunct). This is soon followed by others and by the year 2000 CFDs become known by the average trader.
2000 – 2001 – Retail markets come to realise that the real advantage of CFDs is not just the exemption from the transaction tax, but the possibility to leverage many underlying instruments. CFDs enter their big growth phase.
CFDs offerings quickly expand to include indices, global stocks, currencies, commodities, and more. Index CFDs based on major global indexes such as the Dow Jones, DAX, CAC and others become the most popular CFD type, still retaining their popularity till today.
Within a short time, the London Stock Exchange no longer only covered stocks, but started trading CFDs, which achieved annual growth of more than 100% in volume.
2002 – CFDs begin to expand out of their UK home as providers enter overseas markets, with Australia being the first. CFDs have since been introduced into dozens of other countries and different jurisdictions, including throughout the Euro Zone. The United States is a notable absentee where CFD trading still remains restricted to retail traders due to rules regarding over the counter products and the lack of registered exchanges in the US that offer CFDs.
2009 – UK’s Financial Services Authority (FSA) develops a general regulatory framework for CFD trading, specifically to prevent the use of internal corporate information in CFD trades, following a number of high-profile cases of abuse.
2013 – LCH.Clearnet, Cantor Fitzgerald, ING Bank and Commerzbank launch Europe’s first central clearing of OTC CFDs, in line with EU financial regulations, while working to improve CFD coverage.
2016 – The European Securities and Markets Authority (ESMA) issues a warning regarding the sale of speculative products such as CFDs to retail investors, after an increase in misleading marketing and unscrupulous brokers, many of them registered in Cyprus. European financial regulators respond with new rules on CFD trading.
2018 – The European Securities and Markets Authority (ESMA) agrees to set strict regulations on trading CFDs for the public. A leverage cap is being established along with margin limitations. Licenses are only granted to existing companies that are known and able to cover all obligations for the managing, issuance and distribution of CFDs.
CFDs have come a long way but they show no signs of slowing down. And with increased regulation and a more informed public, trading CFDs with a trusted broker makes managing the associated risks all up to the individual trader’s own discretion.
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