History
CFDs were originally developed in the early 1990s in London as a type of equity swap that was traded on margin. The invention of the CFD is widely credited to Brian Keelan and Jon Wood, both of UBS Warburg, on their Trafalgar House deal in the early 90s.
They were initially used by hedge funds and institutional traders to hedge cost-effectively their exposure to stocks on the London Stock Exchange – mainly because they required only a small margin and (because no physical shares changed hands) avoided UK tax.
In the late 1990s CFDs were introduced to retail traders. They were popularised by a number of UK companies, characterised by innovative services that made it easy to see live prices and trade in real time. The first company to do this was GNI (originally known as Gerrard & National Intercommodities); GNI and its CFD trading service GNI touch was later acquired by MF Global. They were soon followed by IG Markets and CMC Markets who started to popularise the service in 2000.
It was around 2000 that retail traders realised that the real benefit of trading CFDs was not the exemption from tax but the ability to leverage any underlying instrument. This was the start of the growth phase in the use of CFDs. The CFD providers quickly expanded their offering from London Stock Exchange (LSE) shares to include indices, many global stocks, commodities, bonds, and currencies. Trading index CFDs, such as the ones based on the major global indexes e.g. Dow Jones, NASDAQ, S&P 500, FTSE, DAX, and CAC, quickly became the most popular type of CFD that were traded.
Around 2001 a number of the CFD providers realised that CFDs had the same economic effect as financial spread betting except that the tax regime was different, so that it was tax free. Most CFD providers launched financial spread betting operations in parallel to their CFD offering. In the UK the CFD market mirrors the financial spread betting market and the products are in many ways the same. However unlike CFDs which have been exported to a number of different countries, spread betting relying on a country specific tax advantage has remained primarily a UK and Irish phenomenon.
The CFD providers started to expand to overseas markets with CFDs being first introduced to Australia in July 2002 by IG Markets and CMC Markets. CFDs have since been introduced into a number of other countries; see list above.
Until 2007 CFDs had been traded exclusively over-the-counter (OTC); however, on 5 November 2007 the Australian Securities Exchange (ASX) listed exchange-traded CFDs on the top 50 Australian stocks, 8 FX pairs, key global indices and some commodities. There were originally 12 brokers offering ASX CFDs, but as of 2009 there are only five.
In June 2009, the UK regulator the Financial Services Authority (FSA) implemented a general disclosure regime for CFDs to avoid them being used in insider information cases. This was after a number of high profile cases where positions in CFDs were used instead of physical underlying stock to hide them from the normal disclosure rules related to insider information.
Read more about this topic: Contract For Difference
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