The Financial Conduct Authority is proposing to restrict betting on financials for private investors. ETX Capital comments: “if the proposal to reduce leverage is approved you would need to deposit more money in your account to trade.”
Any investor who is not a complete novice knows the risks attached to owning shares; knows that they can go down as well as up. The same is true of those who invest with leverage and on a short timescale: they are aware that losses are at least as likely as profits.
A risk which investors are perhaps less in focus on is that their broker will go belly‑up, potentially leading to the complete loss of funds held with that broker.
In 2011 MF Global, which had taken over futures/CFD broker GNI, went bust due to a variety of problems e.g. unauthorised trading by employees. Assets, including funds belonging to clients of former GNI, were frozen until the firm had been wound up, which took more than a year.
In 2015, spread-betting and CFD broker Alpari UK went bust as a result of losses arising from an extreme move in the Swiss Franc.
When an investment firm folds, client funds are typically lost, unless reimbursed by a government bailout fund such as the Financial Services Compensation Scheme. The more client funds are held by the firm, the bigger the losses (or reimbursements) involved.
I wonder whether the FCA has considered that requiring spread-betting and CFD clients to hold more funds with their broker, for a given size of position, increases risk — both for clients, and for taxpayers who may have to make good the losses in cases of insolvency.
