This article appeared in the July 2007 ASX Traders Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

ASX CFDs - Fundamentally different CFDs

There will soon be a dramatic change in the Australian CFD market with the entry of ASX.  For the first time, CFDs will be traded on ASX.

The CFD market is one of the fastest growing areas in the Australian and European derivatives markets.  In the last year, the number of Australian CFD traders doubled in size from an estimated 15,000 to 30,000 active traders.  Next year, this number is expected to grow to almost 60,000 active traders.

What are CFDs?

A CFD is an agreement between a buyer and a seller to exchange the difference in value of a contract between when the contract is opened and when it is closed. The difference is determined by reference to an 'underlying' instrument - a share, index, FX rate or commodity - and the period over which the CFD is held.

Why have traders been attracted to CFDs?

One of the main sources of appeal of CFDs for traders has been that they are leveraged instruments. That means they enable a trader to obtain full exposure to a share or commodity for a fraction of the price of buying the underlying. CFDs require only a small initial margin to secure a trade.
Traders have also been particularly attracted by the ability to 'go short' that CFDs provide. That means that CFDs allow traders to sell shares or commodities they don't already own, enabling them to make money even when a market is going down.
Also, traders have been attracted by the simplicity of CFDs.  Their pricing mirrors the price of the underlying and is not affected by factors such as time to expiry.

What makes ASX CFDs a fundamentally better alternative?

ASX CFDs will be fundamentally different to existing CFDs and a better alternative for most traders.  They combine the main features of currently available CFDs with the unique attributes of exchange traded markets - notably price transparency, exchange independence and greater investor protection.

For example, with ASX CFDs:

  •  All prices and market depth are fully transparent in the ASX CFD central market order book.  This reflects ASX's statutory obligation to conduct fair, orderly and transparent markets. All traders in the market are given equal access with buyers and sellers able to make or take prices.
  • ASX, as an independent market operator does not take a position against you. There is no conflict of interest.
  • Importantly, ASX CFDs will be centrally cleared which means that traders don't have counterparty exposure to others trading in the market.  There is no need to worry about the other party to your trade meeting their trade obligations or their financial robustness. Counterparty risk is transferred to the clearing house (SFE Clearing Corporation) and the performance of the trade is guaranteed by SFE Clearing Corporation.

Learn more about ASX CFDs

 As leveraged investments, CFDs create the opportunity for gains and losses to be magnified compared to that of direct investments in the underlying instrument. It is therefore important to understand both the upside benefits and downside risks.
To ensure traders are well prepared for trading ASX CFDs, ASX recently launched a free education program that will include:

  • On-line education courses
  • An on-line trading simulator that will allow you to explore the fundamentals of trading ASX CFDs without putting any of your own funds at risk.
  • Seminar programs.

Seminars

ASX in now accepting registrations on its website for free seminars to be held in Adelaide, Perth, Brisbane, Sydney and Melbourne on the following dates:

Adelaide - July 31
Perth - August 6, 7
Sydney - August 14, 16 - 18 and September 11, 13 and 15.
Brisbane - August 21
Melbourne - August 4

These seminars will introduce traders to the ASX CFD product range, the benefits and features of the products and prepare them for trading. As well, there will be the opportunity to meet some of the brokers and advisers who will be offering ASX CFDs.

Registration is essential for the ASX CFD seminars and places are limited, so you are encouraged to register soon to ensure your place.

1 For this contract the market is operated by Sydney Futures Exchange Limited ACN 000 943 377. Sydney Futures Exchange Limited is a subsidiary of ASX.
2 Source: Investment Trends "2007 Contracts for Difference (CFD) Report"