CFD trading or Contracts for Difference trading allows traders to bet on the price movements of financial instruments without buying or selling the associated asset. For example, people can trade gold CFDs and take advantage of the price movements of gold without having to buy or sell gold.
A trader needs to pay a “spread” to a CFD broker in order to be able to trade CFDs while the price difference between the buying and selling price is the trader’s profit.
CFD trading has quickly grown in popularity among retail investors over the past decade caused by the low barrier to entry and the opportunity to benefit from both upward and downward price movements of a large variety of financial instruments. The popularity of CFD trading saw a significant boost due to the coronavirus pandemic and the resultant lockdowns and stay-at-home restrictions.
CFDs are an over-the-counter instrument, however, they carry significant risks. The inherent risk of trading CFDs has caused many European regulators to impose strict restrictions on trading CFDs (like leverage limits) and they have been banned in countries like the US.
ASIC (the Australian financial regulator) has reported that traders have lost billions of dollars from trading CFDs since the start of the pandemic causing ASIC to post stricter limitations similar to those imposed by the ESMA.
However, CFD trading is still widely unregulated in countries in Africa, Asia, and Latin America. The only countries that have CFD regulation in these regions are Malaysia, Singapore, Indonesia, South Africa, and Kenya.
CFD Brokers are targeting Malaysia & SE Asian markets without Local regulation
Many of the leading CFD brokers are targeting Malaysia and other SE Asian markets as their main focus markets. Their marketing efforts are largely focused on online methods and IB channels.
Several of these CFD brokers are even using aggressive marketing techniques to entice potential traders. They are offering cash bonuses for signing up new customers and other such promotional techniques along with celebrity endorsements to promote CFD trading.
Corona virus pandemic has seen an increase in online & offline advertising spend and revenue boost for the CFD brokers in the region. Some of the CFD brokers are even sponsoring big sports events & players to build brand awareness and for attracting new customers in the region. Social media platforms are filled with ads from the big CFD brokers & their IBs offering cash bonuses and trading opportunities in US stocks, forex, commodities, cryptocurrencies and other global markets.
The majority of CFD brokers are now offering their services in the local language such as Malay, Bahasa, Vietnamese, and Thai in order to reach traders in the SE Asian region. 90% of major CFD brokers are reported to have spent on their language localization efforts by building regional language websites and having local chat support in Vietnamese, Thai, Malay & Bahasa.
Many leading CFD brokers also have strong IB networks where they offer handsome rewards & commissions to their IBs to onboard more customers in the region. These IBs in turn focus on local marketing and training efforts for bringing new traders & customers.
Aggressive Marketing through online & offline mediums, strong IB partnerships, rewards, low deposit requirements and localization efforts have brought thousands of customers to these brokers.
According to Safe Forex Brokers Malaysia, “This raises concern as none of the major CFD brokers are regulated by local regulators and none have shown interest in doing so. And the brokers often register the clients of Asian region under offshore regulations like Belize, Mauritius, Labuan, Seychelles, BVI etc. rather than local regulations or top tier regulations of FCA or ASIC where there are better investor protection & strict leverage restrictions. Another major concern is that most brokers are offering exceptionally high leverages (like 1:1000 or even unlimited in some cases) which is unsafe and highly risky for traders.”
It was recently reported by SC Malaysia, that many big name CFD brokers are registering Malaysian clients under offshore regulations and warned public against them and regular alerts are being issued in this regard, which is unsafe for the clients as they don’t have protection of the local regulator, and makes it somewhat illegal in Asian countries for these traders to pay these brokers as it falls under grey area.
SC’s CFD Licensing and its Impact
The Securities Commission of Malaysia released its CFD framework in 2018 to govern and regulate CFD trading in Malaysia. Brokers and other intermediaries need to obtain licenses under these regulations in order to operate in Malaysia.
They are also required to report their transactions under these regulations. Several of the leading global CFD brokers have been banned by the Securities Commission from offering their services in Malaysia.
Forex CFD trading is not allowed by the SC of Malaysia as of date.
Types of CFDs Allowed by the SC Malaysia
The Securities Commission of Malaysia only allows CFD brokers to offer shares and indices. Further, there are several guidelines pertaining to which shares and indices can be offered by a broker to Malaysian clients. As mentioned earlier, the SC does not permit forex CFDs.
In order to receive a CFD dealing license from the SC, a company must meet a few financial requirements.
- The prospective broker must have a minimum paid-up capital of RM 10 million during its operation.
- The prospective broker must maintain liquidity equal to half of its total shareholders’ funds.
These financial requirements have been put in place to ensure that a CFD broker operating in Malaysia has the required financial capital to be able to effectively and safely carry out its business in Malaysia.
Certain margin restrictions have been put in place by the SC of Malaysia in order to prevent use of excessive leverage by investors. These margin restrictions ensure that the risk posed to investors is limited.
- For index shares, the minimum margin that must be maintained is 10%
- For non-index shares, the minimum margin that must be maintained is 20%
- For indices, the minimum margin that must be maintained is 5%
It is clear that the SC has posed highly strict margin requirements on its CFD brokers and traders. Even though this may limit profitability, it allows for greater safety while trading unpredictable instruments such as CFDs.
In order to keep a check on licensed CFD dealers/brokers, the SC has placed a few regular and ongoing reporting requirements.
Each CFD broker licensed by the SC must provide the following:
- Monthly report on transaction information provided in the format issued by the SC for this purpose.
- A monthly statement on the financial status.
- A monthly statement on profit and loss.
- A monthly statement on the availability of liquid capital.
These reporting requirements can be filed be a licensed broker electronically through the SC’s common reporting platform.
The reporting requirements have been put in place in order to ensure that licensed brokers are functioning smoothly and have the necessary financial status to carry on their activities in a safe manner.
Other requirements include:
- CFDs must only be offered to sophisticated investors and broker has to do suitability assessment of investor by making them fill questionnaire to check their risk profile, experience and suitability.
- Proper disclosures to client must be made on key features of CFDs, risks and that it is a leveraged product.
- Must have proper system in place to handle customer complaints.
- Advertisements and marketing material must clear mention risks and that investors don’t own underlying asset.
- Education requirements to educate investors on risks, fees, product features, numerical analysis etc.
- Risk Management systems and procedures for CFD providers.
- There must be no conflict of interest with client, full disclosures made to client on potential conflict and measures to resolve it.
- Segregation of own and client Funds.
- Client’s Margin must be maintained at all times.
- Maintenance of records and submission of periodic reports.
Derivatives and CFD Trading Volume reported by SC
The volume of derivatives and CFD trading has suddenly increased post-2020 as reported by the SC. This can be attributed to the growing popularity of CFD trading in Malaysia and the effects caused by the coronavirus pandemic.
In 2018, the total volume of derivatives traded in Malaysia was 13.52 million RM.
in 2019, the same volume was 13.11 million RM.
In 2020, this volume had increased to 18.03 million RM.
On average, in 2021, the monthly volume of derivatives trading has been around 1.5 million RM with total volume of 18.19 million RM.
Regulated CFD Brokers in Malaysia
Only two brokers have been provided licenses to deal CFDs in Malaysia.
The details of the two brokers have been tabulated below:
|Regulated Activity||License Number||Licensed Since||Status||No. of Reps|
|CGS-CIMB Futures Sdn Bhd||Clearing, Dealing in Derivatives||eCMSL/A0066/2007||28 Sep 2007||Valid||109|
|Phillip Futures Sdn. Bhd.||Clearing, Dealing in Derivatives||eCMSL/A0233/2008||08 Sep 2008||Valid||46|
Warnings and Investor Alerts Issued by SC
The SC of Malaysia has repeatedly issued warnings against trading with offshore and unregulated CFD brokers. However, the popularity of such brokers has still been rising. Many of the most popular global CFD brokers have been blacklisted by the SC.
Leading CFD brokers that have been put on unauthorized list by the SC for operating in Malaysia include OctaFX, FXTM, XM, Tickmill, FXCM, Capital.com, Avatrade, Admiral Markets, Easymarkets, Etoro, FBS and HotForex. However, these brokers are still operating in Malaysia and are accepting clients from Malaysia.
The main reason the foreign CFD brokers remain widely popular in Malaysia is due to misinformation and rampant & aggressive marketing.
Further, there is a lack of local platforms that offer the same features, choice of instruments as provided by these global CFD brokers.
The foreign CFD brokers appear to be avoiding licensed practice in Malaysia due to a complex regulatory environment and high overhead costs associated with being licensed.
Future: Regulators and Brokers need to Work Closer for the Growth of Industry
There are many risks associated with CFD trading. CFD trading is intended for sophisticated investors who are well-versed with the financial markets and can bear and mitigate the risk. Unsophisticated and new investors need to be highly careful while trading CFDs.
Regulators like the SC are working on making CFD trading safer through regulations and oversight. The SC has placed financial requirements, leverage restrictions, and reporting requirements in an effort to hold brokers accountable and make them practice their trade safely.
However, there is still a long way to go since many brokers are avoiding regulation and traders are still misinformed about the need for such regulation and the risks associated with CFD trading.
There is a need for both brokers and regulators to work closely together to promote a safe environment for CFD trading. Brokers and regulators also have the responsibility of investor education so that the market matures.
Regulators should try to make the local CFD market more inclusive by allowing more instruments and to encourage global foreign CFD brokers to get licensed. This can be done by easing the onboarding process.
It is imperative that foreign brokers get local regulation in order to promote trust with local traders. They should try to practice in a safe and regulated environment with a focus in transparency.