CFDs are illegal in the US and Hong Kong but in other countries, they can be traded under strict regulations. In such countries as Austria, Cyprus, France, and Australia, CFD trading is legal but certain regulations are in place to protect the parties involved.
Traders should always do their research and register with a CFD broker who is reliable, credible, and whose reputation for trading these instruments is impeccable. Strict regulations and restrictions exist because CFD instruments, which could cause retail investors and traders to lose more than they can afford, are leveraged products.
Many regulatory bodies also are very clear on how brokers should operate and they tend to prohibit CFD brokers from encouraging their clients to deposit or spend more funds.
They prohibit brokers from offering their clients incentives to encourage deposits or pressuring clients to delay or cancel withdrawal requests. Such conditions and measures are in place to protect retail traders. Regulators are especially concerned with the risks faced by inexperienced investors who may trade more than they should or who may take risks outside their tolerance and beyond their financial capacity.
Which countries ban CFD, let’s find out
United States
In the US, the Securities and Exchange Commission (SEC) is the independent agency responsible for protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. The SEC has restricted CFD trading in the United States. While US residents cannot open an account with a broker, those who hold dual citizenship may open an account and trade CFDs if they don’t live in the US.
Hong Kong
Hong Kong is a business-friendly city and remains one of the top jurisdictions in the world with financial services companies including forex brokers. CFD brokers in Hong Kong use the city as a base for doing business across China and Asia. Brokers in Hong Kong are supervised by the financial regulator known as the Hong Kong Securities and Futures Commission (SFC).
Hong Kong forbids CFD trading but the Securities and Future Commission in Hong Kong allows Hong Kong residents to trade CFDs by using overseas brokers. Despite these limitations on CFD markets, Hong Kong has a considerable individual investor base interested in other products. Local brokers still operate offering a variety of products including margin FX, warrants, CBBCs, futures, listed debt securities, and options.
CFD Trading in Belgium
In Belgium, the distribution of certain CFDs and other over-the-counter derivative financial instruments such as binary options is prohibited. The country’s financial market regulatory watchdog, the Financial Services and Markets Authority (FSMA) has flagged 38 online trading platforms offering unlicensed services in Belgium. The list includes foreign exchange (FX), contracts for difference (CFDs), and crypto trading brands.
Australia
Aussies can trade CFDs but CFD trading is heavily regulated by the Australian Securities and Investment Commission (ASIC). The ASIC has certain conditions for trading, including:
- Standard margin close-outs to put a cap on losses
- Negative balance protection
- Offering incentives to retail investors is forbidden to brokers.
- Maximum ratio for CFDs
According to ASIC’s website, since 29 March 2021, CFD leverage for retail clients has been restricted to a maximum ratio of:
- 30:1 for CFDs including an exchange rate for a major currency pair.
- 20:1 for CFDs including an exchange rate for a minor currency pair, gold, or a major stock market index.
- 10:1 for CFDs including a commodity (other than gold) or a minor stock market index.
- 2:1 for crypto CFDs.
- 5:1 for share or other asset CFDs.
United Kingdom – CFD trading
In the UK, crypto CFD trading has been banned by the Financial Conduct Authority (FCA) as of January 2021. For the trading of other CFDs, the FCA has strict regulations. According to a Press Release by the FCA, in 2020 and 2021, the FCA prohibited 24 firms from marketing CFDs in the UK. The FCA’s actions in 2021 managed to stop an estimated £100 million a year of harm to UK consumers. Sarah Pritchard, Executive Director of Markets at the FCA said: ‘We have set out the standards we expect CFD firms to demonstrate to protect consumers and ensure market integrity.
CFD providers authorized in our regime must sell products appropriately, and when the new consumer duty comes into effect, will need to ensure that products deliver good outcomes for retail consumers. We will not hesitate to take swift and assertive action where we identify harm.” As they highlight on their website, since 2019 when the FCA confirmed new rules restricting the sale, marketing, and distribution of CFDs, firms that sell CFDs and CFD-like options to retail clients are required to:
- Offer leverage which is between 30:1 and 2:1.
- Terminate a customer’s position when their funds drop to 50% of the margin needed to keep their positions open.
- Be able to guarantee that a client won’t lose more than the total funds in their CFD account.
- Avoid providing any form of monetary and non-monetary inducements to encourage trading.
- Provide a standardized risk warning, which shows clients the percentage of their retail client accounts that make losses.
European Union
CFD trading is not banned within the European Union but strict CFD regulations apply. The European Securities and Markets Authority has issued a warning about various speculative products such as CFDs. Under the MiFID 2 (Markets in Financial Instruments Directive 2), or Directive 2014/65/EU, any broker who operates within the EU can offer its products to all residents in the EU. The regulations include maximum leverage for CFDs and ban brokers from offering monetary or non-monetary incentives to traders.
The ESMA CFD regulation introduces a cap on how much leverage brokers are allowed to offer for each given instrument depending on their volatility. For major currency pairs, leverage is limited to 30:1, for non-major currency pairs, gold, and major indices to 20:1, for commodities, non-major equity indices to 10:1, for equities to 5:1, and crypto to 2:1.
CFD regulations are different in each country and it is very important to research and understand what is allowed in your country and what regulatory bodies are responsible for CFD trading. While brokers abide by the laws, a select few may be unregulated and you should be aware of what ways this may affect you.
Choosing a CFD broker
Choosing a reliable and transparent CFD broker is paramount and you should look for various factors when deciding which one to go for. One of the first factors to look at is regulation. There are different bodies and regulations and each one with its restrictions. A regulated broker will provide certain guarantees and will mean that you are protected to a certain degree.
Secondly, transparency, fairness, and clarity are important. Does your broker’s website list all their products, as well as all relevant information about their terms and conditions and privacy policy? If you can easily access this info you will know that your broker has nothing to hide and is upfront about what you can do or you cannot do. From the costs relating to trading to leverage and execution, the details relating to all aspects of your trading experience should be easily accessible.
A dedicated customer care team that is available to provide you with all the answers to your questions is also key. Depending on your needs and what you are looking for from a broker, ensure that your selected broker offers superb products. You can explore their trading platform by opening a demo account.
Disclaimer: This material is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.
