In countries where CFDs are legal, client money protection laws exist to protect the investor from potentially harmful practices of cfd providers. However, the law cannot prohibit client money from being pooled in one or more accounts. Although ASIC requires CFD providers to segregate client funds from firm funds, this does not include money that the CFD provider might use for hedging. Therefore, the provider could subsequently withdraw client money from this account for hedging purposes.
Finsa Pty Ltd, trading as Core Spreads Australia, has produced this policy document to indicate how it handles client money. The purpose of the document is to provide clients with an insight into how client money is reconciled and segregated so that they are better informed to assess the safety of their funds in relation to other CFD providers. Since most cfd brokers pool money from different clients into one or more client accounts, their access to the money held by the CFD provider could be affected if other clients do not pay the CFD provider the money they owe them. In addition, the FCA requires all client money to be deposited directly into the segregated client money account and not into the CFD provider's account and then into a segregated client trust account.
However, note that although CFD providers are required to segregate client money from their own money, they are not required to segregate their money from other client money and a number of cfd brokers "pool" all of their client money into one or more pooled client accounts. CASS restricts CFD issuers from depositing non-client money into the client trust account. Client money remaining in the designated trust account will not be subject to the creditors of the CFD issuer in the event that the CFD issuer becomes insolvent. In general, regulation related to fair pricing in the market should recognise that slippage occurs both in favour of and against the client, and while best execution obligations are well intentioned, regulation that results in asymmetric pricing in favour of either party can be detrimental to the functioning of the CFD market.
For example, if the bulk of the CFD firm's business is focused on a few clients and one or more of those investors suffer losses on their trades that the client cannot cover (e.g. on a losing trade), this may cause serious financial problems for the CFD broker, which may affect whether or not it can meet its obligations to clients. As the financial product is issued by the CFD provider, the CFD provider must indicate prices at which other persons have reasonable expectations that they will be able to regularly affect prices. IG Markets, Australia's largest CFD provider*, has published a beginner's guide to protecting client money on its website.
Persistent positive slippage (i.e. slippage in favour of the client) may result in fewer orders being executed and the CFD provider increasing spreads or only partially executing orders. The relevant question in this case is whether disclosure of symmetric slippage would fulfil the CFD provider's obligation to act in accordance with the best interests of the client. The CFD provider may also decide to "hedge" some or all of the client's trades with one or more firms.
Paul Casey, head of compliance at CMC Markets and head of the CFD Forum, says that currently a client can fund a trading account without engaging in any trading activity, but that these funds can be used by a provider to meet other clients' obligations or hedge itself.