As of September 2020, CFD trading is no longer allowed in the US. The Commodity Futures Trading Commission (CFTC) put this ban in place, which cited the need to protect investors from the high risks associated with this type of trading. So, why exactly has CFD trading been banned in the US? What does this mean for American investors?
What are CFDs?
A CFD or contract for difference is a financial derivative that allows traders to bet on the price change of an underlying asset. Unlike traditional investment products, CFDs do not involve the actual purchase or sale of the underlying asset.
CFD trading is a sort of derivative that allows users to take positions with far less money than they would if they used standard platforms. This comes at a cost of greater risk owing to the high leverage, but it also allows investors to control significant stakes with little cash. It might result in significant gains if the trade works out, but it also magnifies losses when things don’t go as planned.
Why are CFDs banned?
Due to the high risks involved, CFD trading has long been considered unsuitable for retail investors. Many jurisdictions, including the United States, have imposed limitations on CFD trading to protect investors from suffering significant losses.
The CFTC’s decision to ban CFD trading in the US comes after a long period of consideration and debate. In 2018, the CFTC proposed a rule change that made CFD trading illegal in the US.
The CFTC revisited the issue in 2020 and, this time, decided to move forward with the ban. The agency believes that CFD trading is too risky for retail investors and that the best way to protect them is to prevent them from trading these products altogether.
This ban will likely have a significant impact on the online trading industry, as Many popular brokers offer CFDs. It’s still unclear how exactly this ban will be enforced, but US-based brokers will likely need to stop offering CFDs to American traders, or they will need to move their operations offshore.
This ban may also prompt other jurisdictions to follow suit. The UK’s financial regulator, the Financial Conduct Authority (FCA), is currently considering a similar ban on CFD trading. If the FCA does decide to implement a ban, it would have a significant impact on the global online trading industry.
Some questions you might have
How do CFDs work?
Futures are the most common type of CFDs, with over half of all traders using this instrument. Futures are attractive to traders because they provide a high leverage, allowing investors to manage substantial stakes with only a small amount of money.
What are the risks of trading CFDs?
The risks involved in CFD trading are very high. Only those willing and able to lose money should consider this type of trading.
What is the CFTC?
The Commodity Futures Trading Commission (CFTC) is a government body in the United States that regulates futures and options exchanges.
What is the FCA?
The Financial Conduct Authority (FCA) is a financial regulator in the United Kingdom. It is in charge of regulating financial services in the UK. What impact did the CFTC’s decision to prohibit have?
CFD trading in the US?
The CFTC’s decision to ban CFD trading in the US will significantly impact the online trading industry. It’s still unclear how exactly this ban will be enforced, but US-based brokers will likely need to stop offering CFDs to American traders, or they will need to move their operations offshore. This ban may also prompt other jurisdictions to follow suit.
In conclusion
For now, American investors who want to trade CFDs will need to do so through international brokers. It’s important to remember that the risks involved in CFD trading are very high. Only those willing and able to lose money should consider this type of trading.
