CFD's and Companies Going Bust

[DGC]

Hello

I have a question. Forgive me if this is not the correct forum, but I couldn't find another one for CFD's.

Can anyone tell me what happens if a company I own CFD's in goes out of business. For example, and using ease of figures, say I have £10,000 worth of CFD's at 10% margin, so I've only put up £1000 to buy them. If the company then went bust, would the CFD broker ring me up and say you need to send us £9000 (because the overall exposure was £10,000), or would I only lose the margin amount. And, lets further say, if I took out a 'guaranteed stop-loss' at a certain level would that level be honoured if the shares got wiped out, I mean does the broker take the hit?

Any light on this gratefully received.

Thanks

DGC.

 

[capitalspreads]

DGC

I can only comment for how capitalcfds.com would treat this if u have no guaranteed stop then you are on hock for 9k

if u have a guaranteed stop then the broker is on hock for the 9k (assuming there ware no dirty deeds at the pass... i.e you are a director of the company or you had some knowledge of events/ but then you would be more likely to be short!).. although some brokers will not give guaranteed stops on small caps

Simon

 

[DGC]

Thanks Simon

No. I'm not a director or anything; I just wondered what would happen.

I only trade large stocks (FTSE-100/250) anyway, so the chances are probably slim that they'd go bust, they're more likely to be taken over. However if you wanted to be absolutely sure, it's probably best to go down the guaranteed route any way, especially if one was pyramiding.

Thanks again

DGC

 

[Lillojohn]

That is an good question. Now I am thinking about it myself.

 

[Brumby]

In theory you are on the hook if you don't have insurance i.e. a guaranteed stop. It is no different to a situation if a share price drops from $1 to $0.01 and you are still holding onto your long CFD position. The daily marked to market will effectively reduce your equity by the drop in value. The difference in this case is a bust scenario. If you are trading CFD's, always be prudent with your risk management and assume the worst as you are dealing with a highly leveraged instrument. A company does not go bust overnight and would long be reflected in its price chart.

 

[PipStar]

DGC
I can only comment for how capitalcfds.com would treat this if u have no guaranteed stop then you are on hock for 9k
Simon

Why would that be when you are not a DMA broker which means that you are on the other side of the trade? The trade itself being just synthetic, why would your outfit profit from 9k because a company has gone out of business and is worth zero? I can't see the fairness of this. In any case, you would have trouble getting the client to cough up the extra 9k if this happened. Good luck.

 

[capitalspreads]

pip star

i am very sorry if reality offends you... ... so if i had a client who was short and this event happened .. by the same argument i should not have to pay him as it is not 'fair'....

otherwise what is the point of Guaranteed Stops .. if you just let people off when they owed money.

in actuality nearly all SB and CFD companies hedge the vast bulk of their equity exposure... so if the share price went from something to nothing overnight then we would also have lost.

there really is no such thing as a free lunch

Simon

 

[scose-no-doubt]

CFD = contract for difference. You've entered into an OTC contract with a bookie for the difference in the price from T to T1 for whatever financial instrument. If the shares go to zero then you've got your difference innit.

If the shares were pulled from market then I'm assuming that treatment would be different eh Capital Spreads? No gain, no loss?

 

[capitalspreads]

scose

not sure what you mean.. 'pulled from the market' ? does not have a meaning.

if a share is delisted by their own choice most companies would close at the last price... but to be honest we have never had such an event....most of the time shares just get suspended due to some catastrophic event and then we wait... and wait.. and wait until the accountants give a final payout.

just like buying the real underlying equity
simon

 

[Vasco da Banana]

In this case what difference would there be between CFD and spreadbet. Gambling debts aren't recoverable, I believe, so would the SB have to take the hit?

 

[capitalspreads]

Banana

unfortunately that is one of the negative points for clients about being regulated by the FSA and having all the protection of the FSCS.

as spread bet are recognised financial instruments by both Mifid and the FSA any debt is legally recoverable.

unlike with a bet on the gee gees which isnt.

sorry

simon

 

[breadman]

what happens if you are short, and a company goes bust and the shares are suspended at say 10p. I remember reading years ago that you would have to get a copy of the share register and find someone willing to sell you their shares to close your short. is this or was this ever the case or does the sp/cfd provider just close the trade at 10 p which was the last listed price.

thanks,

breadman

 

[breadman]

i see simon says most would close at the last traded price. were the rules different years ago.

 

[capitalspreads]

bankrupt companies will normally close at zero... unless there is something odd about it...

if a share is suspended we do reserve the right to just close all trades at the last traded price after four days of suspension ..... which is an option we have used a couple of times in the last ten years. There was one about an aero engine servicing company about a year or so ago (cannot remember the name).. i think that one was closed at the last traded price (which as our clients are always long of such stock is in their favour overall)

but to be honest this just does not happen much .. nearly all companies go down to 1p or even lower before going under.

simon

 

[Vasco da Banana]

Banana

unfortunately that is one of the negative points for clients about being regulated by the FSA and having all the protection of the FSCS.

as spread bet are recognised financial instruments by both Mifid and the FSA any debt is legally recoverable.

unlike with a bet on the gee gees which isnt.

sorry

simon

Spoilsport!

 

[Brumby]

If the shares were pulled from market then I'm assuming that treatment would be different eh Capital Spreads? No gain, no loss?

You are then dealing with legality and technicality as to what is in the fine print. There are numerous scenarios:
temporary suspension
indefinite suspension
delisting
reconstruction
voluntary winding up
involuntary liquidation

 

[capitalspreads]

Brumby

Yes the problem really is that there are so many variants that we cannot cover them all.

Also we must be reasonable, fair AND consistent. We cannot settle in one way one day and in another on a different day if the circumstances are the same.

What will seem fair to a client who is long may not seem fair to one who is short !

In the end it winds down to the fact that we must take into account what has really happened in the 'real' world to the real underlying equity.

Simon

 

[ffsear]

Its likely that all positions will be closed at the time the company got placed into administration. If money is due to you you wont see it. If you owe money, go silent on them