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Contracts for Difference (CFD)

Are CFDs appropriate retail investments?

John Hewison
Founder and Director
3 Nov 2011

Included the proliferation of investment product engineering that led to the GFC are “Contracts for Difference” or CFDs.


CFDs are complicated investment contracts that enable the investor to take a leveraged position in an underlying securities such as shares, options, futures or indices at a small part of the face value of the investment – similar to option or futures trading but in a packaged format. When the investor buys or sells a CFD the only asset they are trading is the contract itself, not any direct entitlement to the underlying asset. So, not only is there inherent risk of leveraging loss potential by virtue of the investment itself, there is also “counter party” risk in the event the issuing CFD broker becoming insolvent.

We have avoided these things like the plague knowing how complex and high-risk they can be and it has amazed us that the regulators have approved them for public or retail consumption. Not only are they high risk, they are extremely difficult to understand and yet the unsuspecting public is allowed to trade in these things.
We now see that one of the World’s largest distributors of CFDs, US based MF Global, has been placed into voluntary receivership, including its Australian operations, resulting in the freezing of thousands of client accounts across Australia.

We saw similar occurrences through the investment of retail investors in Corporate Debt Obligation CDOs, or corporate debt packaged up to look like a low-risk secured fixed interest investment when it really contained high risk debt which ultimately collapsed as part of the sub-prime debacle.  

Yes, corporate greed and US government stupidity had a lot to do with the ills of the GFC but my question is: Where does the responsibility of the regulator begin in the protection of the retail investor against such inappropriate, complex products?

It is all very well to hold advisers responsible for recommending the use of such investments and warning of their risks, but the reality is that no amount of explanation will be understandable to unsophisticated investors…. and the notion that retail investors read all the detail of a product disclosure statement (PDS) is just naive.

Surely it is about time for the regulators to play a more active role in approving the suitability of complex investments to retail investors or at least ensuring they are adequately warned. Perhaps high risk product disclosure statements should be required to display a mandatory High Risk warning in big, bold, red letters and a requirement for the investor to sign an indemnity that would leave them in no doubt about the risks they are taking. This might be a start. 


Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.