MF Global

Pricing/Contract Value

The contract value also known as the face value of a CFD, is defined as the number of shares specified in the contract multiplied by the price of the underlying share. The contract value will change in line with the movements in the price of the underlying share. CFDs are marked-to-market, which means that the contract is revalued daily at the close of business of the underlying share.

The price of the underlying share and the CFD are the same. This means that CFDs give you access to the liquidity of the underlying market. Because the prices of a CFD mirror the underlying market, CFDs are one of the most transparent derivatives available to retail investors.

Margin

CFDs are traded on margin, and the margin is the amount of deposit required to open up a position. By trading on margin, the investor does not pay the full purchase price of the shares and margins typically start from 5%. Margins are calculated as a percentage of the overall value of the position. Margins are charged to cover the trader’s account in the event that the position held moves against them. The margin amount is returned to the trader when the position is closed out.

Variation margin is the difference between the value of the CFD at the time of buying or selling and its value marked to market at the end of the trading day.

In the advent of any adverse price movements and the investor’s total equity falls below the initial margin requirement, the broker issues a margin call. The investor now has to either increase the margin deposited, or close out one or more of the open positions to meet the minimum margin requirement.

Financing

CFDs are subject to a daily financing charge, which is applied at a previously agreed rate (haircut) above or below the relevant interest rate benchmark for that country. Investors who hold a long CFD position overnight are subject to pay interest on the full value of the open position. Investors who hold a short CFD position overnight will be paid interest on the full value of the open position.

Interest is paid or received on a 100 percent of the value of the underlying position. There are no deductions for the percentage used as the initial margin to secure the trade. The reason for this is that the initial margin is not a down-payment on the rest of the value of the position. It is security held by the broker against any possible losses incurred on the position.

If the official cash rate in Australia (set by the Reserve Bank of Australia) is 5.5% p.a., the broker may charge a haircut above and below of +3/-3%. In this example, a holder of a long CFD position is charged 8.5% p.a. (5.5% + 3%) daily for holding positions open overnight, and a holder of a short CFD position is paid 2.5% p.a. (5.5% - 3%) daily for holding the position overnight.

Example of financing

An investor is holding 1,000 units in XYZ CFDs at a price of $10.00. The value of the contract is $10,000. If the financing charge for open long positions is 8.5% p.a. financing is calculated as follows:

($10,000 x 8.5%) / 365 = $2.33 per day at contract value $10,000

If on the following day the share price has risen, and the closing value of the contract is now $11,000, the financing charge for that day is calculated as follows:

($11,000 x 8.5%) / 365 = $2.56 per day at contract value $11,000

On the other hand, if on the following day the share price has fallen, and the closing value of the contract is now $9,000, the financing charge for that day is now calculated as follows:

($9,000 x 8.5%) / 365 = $2.10 per day at contract value $9,000

Costs

Commissions are charged on each CFD trade. When you open or close a CFD position a commission is charged upon execution. The commission is based on the contract value, in much the same way as when trading the underlying shares. Generally the commissions are cheaper than commissions charged for share trading, and are typically expressed as a percentage of the contract value with a minimum charge. GST is not charged on commissions.

Example of commission

An investor wishes to purchase 1,000 units in XYZ CFDs at a price of $10.00. The value of the contract is $10,000. If the commission charge is 0.125%, the commission cost is calculated as follows:

$10,000 x 0.125% = $12.50

Corporate Actions

Corporate actions like dividends and rights issues that affect a stock will be reflected in the value of your CFD account. The effect of corporate actions on your CFD will fully replicate that of the stock on the ASX (exclusive of franking and imputation credits). However, CFDs do not entitle you to voting rights in connection with the underlying shares. The benefits are credited to investors in a long CFD position and deducted to those with open short positions.

If a company pays a dividend, the holder of a long CFD will receive, on the ex-dividend date, a payment that equates to the gross unfranked dividend on the underlying share. CFDs do not confer rights to any dividend imputation credits. In contrast, the holder of a short CFD will, on the ex-dividend date, is charged an amount equal to the gross unfranked dividend.

Example of dividend adjustment

An investor is holding 1,000 units in XYZ CFDs and the position is still open at the time of the XYZ ex-dividend date. The amount of the declared cash dividend is 6c per share and this is credited to the investor’s account. The adjustment is calculated as follows:

1,000 shares x $0.06 = $60