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Micro ES SP500 contract "coming" (E-Micro)
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Micro ES SP500 contract "coming" (E-Micro)

  #71 (permalink)
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ZCars View Post
Interesting, thanks for the insight. I think I understand about OTC derivatives, but surely the banks still make trades and markets this way and always will? In the UK we have the FCS (financial compensation scheme) for retail investor's funds that are held by the broker in tier 1 UK banks. This means that you're covered up to £50,000 and the broker cannot touch client deposits (something that MF Global happily did). As far as I'm aware US citizens are not covered if a futures broker/ fcm goes under?

Yes, you do raise a valid concern with regards to FCM protection in the US. Typical protection is provided by keeping the customer monies segregated from the broker's cash. Should a broker violate that rule, then of course your account is at risk. However, this applies to both brokers dealing in listed futures, as well as CFD brokers. While it is always preferable to have government protection, i.e. FSCS, the protection is usually limited to smaller accounts.

However, CFD brokers (FX and spread-betting brokers included) have another risk to address as well. A regular broker passes on his orders to the exchange and theoretically never has any risk on his accounts. A CFD broker will aggregate client orders and once his exposure exceeds a certain threshold, he will hedge the exposure in the market. This does however mean that the broker has a position in the market and needs to honour any losses his positions incur. Usually these losses will be recouped from client accounts, i.e. the client loses money and the broker transfers that money to his counterparty. Should the client not have enough money and should the broker not be able to liquidate the position fast enough, the broker will lose money. Refer to the following link for more detail - Alpari UK currency broker folds over Swiss franc turmoil - BBC News


Quoting 
"Where a client cannot cover this loss, it is passed on to us," it said. "This has forced Alpari (UK) Limited to confirm today that it has entered into insolvency."

The above quote comes from the article and in effect explains that Alpari was properly hedged, i.e. it was not trading against its customers. In effect, Alpari did nothing wrong. Its customers just were too exposed and Alpari had too little cash in reserve to cover the losses from the extreme move.

With a normal brokerage, you should not be exposed to this type of risk. The FCM is never exposed to market risk and thus in theory should never be going bankrupt on an extreme move like this. However, I am not sure what would happen if an event like 1987 were to reoccur and a FCM could not make its payment to the exchange in the event that its reserves were insufficient to cover customer losses. Perhaps someone else could clarify that item.

Thus, in summary, you are always exposed to the risk of fraud / misappropriation of assets with any broker, but a CFD broker is also exposed to market risk. Government protection can provide some cover, but is usually aimed at smaller (retail) accounts. Therefore, as with all things, it is up to the individual to weigh the pros and cons and decide which vehicle (or broker) is correct for them.

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  #72 (permalink)
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Does anyone know and can clarify if it's US residents or US citizens that are banned from CFDs?

I'm a US citizen and resident for now, but the latter may change soon.

Thanks!
-Bob

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  #73 (permalink)
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grausch View Post
Yes, you do raise a valid concern with regards to FCM protection in the US. Typical protection is provided by keeping the customer monies segregated from the broker's cash. Should a broker violate that rule, then of course your account is at risk. However, this applies to both brokers dealing in listed futures, as well as CFD brokers. While it is always preferable to have government protection, i.e. FSCS, the protection is usually limited to smaller accounts.

However, CFD brokers (FX and spread-betting brokers included) have another risk to address as well. A regular broker passes on his orders to the exchange and theoretically never has any risk on his accounts. A CFD broker will aggregate client orders and once his exposure exceeds a certain threshold, he will hedge the exposure in the market. This does however mean that the broker has a position in the market and needs to honour any losses his positions incur. Usually these losses will be recouped from client accounts, i.e. the client loses money and the broker transfers that money to his counterparty. Should the client not have enough money and should the broker not be able to liquidate the position fast enough, the broker will lose money. Refer to the following link for more detail - Alpari UK currency broker folds over Swiss franc turmoil - BBC News



The above quote comes from the article and in effect explains that Alpari was properly hedged, i.e. it was not trading against its customers. In effect, Alpari did nothing wrong. Its customers just were too exposed and Alpari had too little cash in reserve to cover the losses from the extreme move.

With a normal brokerage, you should not be exposed to this type of risk. The FCM is never exposed to market risk and thus in theory should never be going bankrupt on an extreme move like this. However, I am not sure what would happen if an event like 1987 were to reoccur and a FCM could not make its payment to the exchange in the event that its reserves were insufficient to cover customer losses. Perhaps someone else could clarify that item.

Thus, in summary, you are always exposed to the risk of fraud / misappropriation of assets with any broker, but a CFD broker is also exposed to market risk. Government protection can provide some cover, but is usually aimed at smaller (retail) accounts. Therefore, as with all things, it is up to the individual to weigh the pros and cons and decide which vehicle (or broker) is correct for them.

Thanks for a clear explanation. Yes, CFD brokers, as counterparty are taking on risk (a good firm can hedge most of this out through matching clients positions against each other, as far as I'm aware, in this respect they are acting partially as an exchange) although their systems are far more sophisticated than they used to be (I know this from experience). I think there are pros and cons as you say and as long as you trade deep liquid markets using CFD's then the service can be a good alternative to the primary derivatives exchanges. The Swiss Franc shock cost Interactive Brokers a few million I believe and there is always risk as market maker (they are for their FX offering), so a firm that has a larger client base and is well capitalised is important.

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  #74 (permalink)
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bob7123 View Post
Does anyone know and can clarify if it's US residents or US citizens that are banned from CFDs?

I'm a US citizen and resident for now, but the latter may change soon.

Thanks!
-Bob

US Residents regardless if they are citizens or not.

If you are a US citizen residing outside the US, you can trade CFD's

Math. A gateway drug to reality.
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  #75 (permalink)
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traderwerks View Post
US Residents regardless if they are citizens or not.

If you are a US citizen residing outside the US, you can trade CFD's

I did a bit of research myself, and I believe you are correct, BUT

-I'd need to find a broker willing to take on a US citizen. (not all will)

-CFDs aren't perfect, they can have liquidity issues among other problems.

That said, if anyone knows of a broker that can offer a pseudo micro ES (or other futures contract) I'm all ears.

Also, I wonder what the story is if a US resident owned an overseas LLC. (or whatever they would call it in the host country; I believe LLC is a US specific small corporate structure) Could the US resident trade CFDs out of that?

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  #76 (permalink)
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bob7123 View Post
I did a bit of research myself, and I believe you are correct, BUT

-I'd need to find a broker willing to take on a US citizen. (not all will)

-CFDs aren't perfect, they can have liquidity issues among other problems.

That said, if anyone knows of a broker that can offer a pseudo micro ES (or other futures contract) I'm all ears.

Also, I wonder what the story is if a US resident owned an overseas LLC. (or whatever they would call it in the host country; I believe LLC is a US specific small corporate structure) Could the US resident trade CFDs out of that?

I was struggling to find any concrete evidence that US citizens not residing in the US are allowed to trade CFDs. Would you mind sharing a link? I can offer the following: Section 3(a)(65) of the Securities Exchange Act of 1934, as added by the Dodd-Frank Act, available at: http://www.sec.gov/about/laws/sea34.pdf, cross-referencing Section 1a(18) of the Commodity Exchange Act, available at: https://www.law.cornell.edu/uscode/html/uscode07/usc_sup_01_7_10_1.html. On the Commodity Exchange Act search for "Eligible contract participant". Based on this I could not find anything that would exclude US citizen unless you are HNW.

With regards to brokers accepting US clients, either via an overseas LLC or via direct investment in the case of a non-resident US citizen, you run into the FATCA problem. All financial institutions are required to collect information on the ultimate beneficial owners (with some exceptions) of entities or persons having accounts with them. Should you not have any US-clients, then the FATCA reporting is less complex. Should you have US-clients, then you need to ensure you can correctly report in terms of FATCA. In order to minimize regulatory risk, several financial institutions have decided not to accept US clients. Thus, even if it were legal you may struggle to find a CFD broker with the necessary systems in place to accept you as a client.

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  #77 (permalink)
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bob7123 View Post
I did a bit of research myself, and I believe you are correct, BUT

-I'd need to find a broker willing to take on a US citizen. (not all will)

-CFDs aren't perfect, they can have liquidity issues among other problems.

That said, if anyone knows of a broker that can offer a pseudo micro ES (or other futures contract) I'm all ears.

Also, I wonder what the story is if a US resident owned an overseas LLC. (or whatever they would call it in the host country; I believe LLC is a US specific small corporate structure) Could the US resident trade CFDs out of that?

I have accounts with IG & FXCM, but they are small. I used them for learing, and I do not trade with them anymore. I also have not had a problem with FACTA, but I have not opened any bank account since FACTA came out. Just me I guess.

Here are the stock index markets https://www.fxcm.com/uk/markets/cfds/stock-indices/ they use names like SP500 for the ES and FRA40 for the CAC40.

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  #78 (permalink)
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traderwerks View Post
I have accounts with IG & FXCM, but they are small. I used them for learing, and I do not trade with them anymore. I also have not had a problem with FACTA, but I have not opened any bank account since FACTA came out. Just me I guess.

Here are the stock index markets https://www.fxcm.com/uk/markets/cfds/stock-indices/ they use names like SP500 for the ES and FRA40 for the CAC40.

Thanks. I see you are resident in Taiwan, therefore I assume FXCM would have done their due diligence and concluded you are allowed to trade CFDs. Would be nice to find the actual exemption in the law though...

FATCA won't really present much of a problem for the end-client. You would already have provided all of the needed documentation as part of the normal KYC documentation when opening your account. Financial institutions however faced a completely different scenario in that being non-compliant with FATCA meant you could incur pretty large penalties. Therefore some smaller financial institutions decided to rather not accept US clients and reduce both their risk and reporting requirements. Larger financial institutions or those heavily dependent on US-customers would just have ensured that their systems were ready to deal with the requirements of FATCA.

With regards to the offshore LLC, since the broker will have info on the ultimate beneficial owner, I am sceptical whether a broker will allow trading CFDs if the owner is a US-resident. While I am no legal expert, governments usually take a dim view of transactions aimed at circumventing laws.

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  #79 (permalink)
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traderwerks View Post
I have accounts with IG & FXCM, but they are small. I used them for learing, and I do not trade with them anymore. I also have not had a problem with FACTA, but I have not opened any bank account since FACTA came out. Just me I guess.

Here are the stock index markets https://www.fxcm.com/uk/markets/cfds/stock-indices/ they use names like SP500 for the ES and FRA40 for the CAC40.

THANKS! I'll give 'em a call when I move. (wife just got a job in Istanbul) I suppose the worst they can do is say no...

BTW, can you tell me what the minimum trade size is for ES? The real mini will move $12.50 per tick, $50 per point (per contract) What's up with their CFD? I was a little confused by their chart.

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  #80 (permalink)
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bob7123 View Post
THANKS! I'll give 'em a call when I move. (wife just got a job in Istanbul) I suppose the worst they can do is say no...

BTW, can you tell me what the minimum trade size is for ES? The real mini will move $12.50 per tick, $50 per point (per contract) What's up with their CFD? I was a little confused by their chart.

If you're based in Istanbul I think you can trade with most european/ uk cfd companies (I think) ADS securities, London Capital Group, Core Spreads and LMAX are all good. The minimum would be £1/ per ES point with no commissions but 0.4 in spread.
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