contracts for difference your trading handbook

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Contracts For Difference

A division of FirstRand Bank Limited. An Authorised Financial Services and Credit Provider (NCRCP20).

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Introduction to CFD TradingHave you heard about contracts for difference (CFDs), but are not sure how to use them or how to use them alongside investing in shares? FNB Stockbroking and Portfolio Management (SPM) have got you covered. In this series of notes that will follow, we’ll give you all the details you’ll need to become a confident user of CFDs.

CFDs can seem intimidating at first. They are a form of derivative, which means people usually think they are complicated. But CFDs are actually a very user-friendly way of gaining exposure to shares in a cost-effective manner. The two most important features of CFDs compared with just buying the shares directly are that they are less expensive from a trading point of view and the exposure you gain is quite significant compared to the amount you invest.

FNB SPM provides CFDs for the top 60 shares on the JSE, which are the largest and most traded shares on the JSE. We have also added some exchange - traded funds for your benefit.

We asked research house Intellidex to outline how CFDs work for our clients. In this note they focus on the key features of CFDs, to assist you in becoming a successful CFD trader.

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Introduction to CFD Trading

1. What is a CFD?

3. Maturity profile and resets

2. Comparison between returnsof CFD and share trading


Advanced Traders

4. Understanding the FNB SPMCFD trading platform

As this diagram implies, no one needs to own the reference asset although FNB SPM will always hedge its exposure and never hold naked positions against clients. The only thing that is agreed on is that one party will pay the other party an amount depending on what happens to the price of the share. This is one of the reasons that CFDs can be less expensive than trading underlying shares, because certain transaction costs are avoided, such as securities transfer tax. Also, one need not pay the full price of the shares to gain the exposure. The settlement will usually be a smaller amount of the underlying exposure; therefore only a smaller amount of cash needs to be paid for the contract up front. As the share price moves during the life of the contract, the counterparties will each contribute or withdraw cash, depending on whether the share price moves in their favour or against them.

A counterparty can be on either the long side or the short side. FNB SPM will be the counterparty whatever exposure you take, either long or short.

CFDs are unique in that they offer an easy way to take a short position in the market.

1. What is a CFD?

Long side Short side

Share price at start: R1 000

Share price at end: R1 200

R200 R200

Share price at end: R800

As the name implies, a CFD is a contract. It states that one party will pay the other party an amount equal to the difference between the price of a share at the start and at the end of the contract. So, imagine shares worth R1 000 at the time you draw up the contract, that appreciate to R1200. The contract says that one counterparty pays the other R200. If the shares depreciated to R800, then there would still be a payment of the difference in price, but this time in the other direction. You can then see why these are called “contracts for difference”. This is illustrated in the diagram below.

Figure 1: Basic structure of a CFD

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2.1. Capital outlay

The “capital outlay” refers to the amount of cash you have to put down to obtain a CFD. Whereas in share trading you pay the full price of a share, CFDs offer exposure to a share at a small percentage of the cost of owning the share. This amount is called the margin, and it is effectively a deposit paid at the start to cover the credit risk that may arise as the reference share price changes. FNB SPM determines this margin for each investor using a combination of the Safex margin rules set by the Johannesburg Stock Exchange and the client’s individual (investor) risk profile. (In other educational notes we will discuss how FNB SPM determines your risk profile.)

2.2. Long exposure

With a long exposure, you gain when the reference share price increases. For example, the FirstRand share price was R60.00 on 31 May 2018. If your margin was 15%, you would pay R9 to gain full exposure to one share. On 1 June 2018 the FirstRand share closed at R61.25. This represents a gain of R1.25. If you bought the share on the JSE, your holding period return (HPR) would be only 2.1% (that is, R1.25 out of R60.00). However, with a CFD position, your HPR is 13.9% (R1.25 out of R9.00). Your CFD return is said to be leveraged. Returns are amplified compared with normal share trading. (We have used margin of 15% in this example but note that it differs from person to person.)

2. Comparison between returns of CFDand share trading

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Here’s the catch though: CFD trading similarly magnifies your losses. Buying a FirstRand share on 28 May 2018 at R61.30 would mean paying the full amount, but using a CFD would cost R9.20 (15% of R61.30). On 29 May the counter closed at R60.00, which translates to a capital loss of 2.1% for a normal share position, while the capital loss is higher at 14.1% for a CFD. Also, the margin balance has fallen to R7.90 from R9.20 – 13.2% of the share price and short of the required margin balance of 15%. The short side would have to top up the margin and deposit more cash in their account to restore the deposit.

2.3. Short exposure

We are accustomed to first buying a share in the hope of selling it later when the price goes up. However, it is possible to do the opposite, sell first (by borrowing the share) and buy later (to return the borrowed share). The common denominator is that you are buying at a lower price and selling at a higher price, making a profit regardless of which leg of the trade happens first. So, when you start by selling shares (that you do not own) with the hope of buying them later at a lower price, you would have taken a short exposure or position. For retail investors, it is difficult to open a short position through traditional share trading, but it is entirely possible using CFDs. You can take a short exposure when you expect the share price to fall.

So far our discussion has ignored trading costs such as commissions, fees, VAT, stamp duty and finance costs. We will explore these concepts in future educational notes.

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Unlike most derivatives such as futures that have a maturity or expiration date, CFDs do not expire until you (the buyer) decide to close out or exit the position. However, at the end of each day, FNB SPM resets your account. This means that if the share price moves in your favour during the day, FNB SPM will credit your account with the gain. However, if the share price moves adversely, you are in a loss position. For you to keep the CFD position open, you will need to ensure that your account has sufficient margin of at least 15% of the closing share price. Should your margin amount fall below 10.5%, the level FNB SPM has set as a trigger, FNB SPM will be forced to exit positions on your behalf, enough to return the margin cover to 18% (note that it’s more than the required 15%). The additional three percentage points are to protect both parties (you and FNB SPM) in case of another adverse price movement.


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This note explains how to use the FNB SPM CFD trading platform. It covers:

• Basic website navigation; how to place a trade and amend or cancel it; how to withdraw cash; how to fund your account; viewing the order book; etc

• How to load stop-losses

• CFD risk-profiling methodology

• CFD coverage list

• Portfolio auto close-out treatment

• Treatment of positions when top 60 index changes

• Treatment of positions when margins change

• Treatment of positions upon scrip recall

• Understanding your daily and monthly statements

4. Understanding the FNB SPM CFD trading platform

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To trade CFDs, you will need to apply for a derivatives trading account.

Registration is once-off.

4.1. Gaining access to the FNB SPM online trading platform

The first step is to log in to your FNB SPM online account at shares.fnb.co.za . The home page gives you an overview of your portfolio. This is the starting point for all FNB SPM Trading.

Note that the “Total Portfolio Value” you see here does not include your derivatives positions.

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Fill in your details to register.

Select "Derivatives Trader".

Submit registration

Continue with completing your application until you reach "Save and submit".

A new FNB SPM client should visit our website shares.fnb.co.za to open their account

Click "open account" once on the website.

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Select “My Account” and then click “Open Account”.

Existing FNB SPM clients should log in to their profiles and follow the below:

Select “Yes”.

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Select “Derivatives Trader” and then fill in all sections of the application form and submit the required FICA documents to [email protected] (for new clients only).

Under the “Derivatives Trader Financial Needs Analysis” section, you will be asked some questions to determine your risk profile and the margin required to initiate CFD trading. The risk profiles determine the level of margin that you will be required to put down to initiate CFD positions. There are four risk archetypes with the following margin requirements: 12%; 15%; 18%; and 21%.

Once your account is approved you can fund it and start trading CFDs.

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Select “Derivatives cash management” and click "Deposit".

Use the last six digits of your CFD account number. Alternatively, search for FNB Stockbroking

CFD as a public recipient your online banking.

4.2.1 Funding CFD account:

Select "My portfolio” and click "Derivative".

4.2. Funding or withdrawing from your CFD account

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Select “Derivatives cash management” and click "Withdraw".

Fill in your details until you reach "Submit".

4.2. Funding or withdrawing from your CFD account

4.2.2 Withdrawing from your CFD accountSelect “My portfolio” and click " Derivative " .

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4.3. Trading CFDs

To get to the dedicated CFD trading platform select “My Portfolio” and then click “Derivatives”.

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You will land on the “Derivatives Profile Summary” page showing your CFD account number and cash balance.

Click “Derivatives Trading” and then “Launch Portal”, which will take you to the Iress Investor Platform.

You may need to allow pop-ups in your web browser for the CFD platform (Iress Investor platform)to launch a new webpage.

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The default Iress Investor platform landing page looks like this when you have no CFD positions open:

Click on "Portfolio" then "Intra-day portfolio" for the view above.

You may change your default viewing by clicking “User” under menu options.

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The “Fee” column shows the margin required per CFD you can determine the number of CFDs you can buy by dividing the capital you want to spend by the fee.

The “ShortSell” column shows whether or not you can open a short position.

4.4. Shares available for trading

Select “Portfolio” and then “CFD Margins” to see the shares that are available for CFD trading, including their required margins.

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For a simple buy order (long exposure), follow steps 1-6 as shown above and outlined below.

Step 1: Click “Buy” (or “Sell” for a short position).

Step 2: Type in the JSE code of the share you want to trade.

Step 3: Click the “search function” or hit the “Tab” key on your keyboard.

Step 4: Type the number of CFDs you want to open.

Step 5: Click the “play function” (that generates the pricing information).

Step 6: Click “Buy” (or “Sell”).

4.5. How to open a position

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1

23 5

4

6

There are a few more steps to complete:

1. To set your pricing instructions, choose “Limit” or “Market”:

• Limit: is executed when the price reaches the set price. Limit is generally used when you expectthe share price to fall to a certain price before you open a long position or to rise to a certainprice before you initiate a short position.

• When you select “Limit” you type the limit price manually in “Order Price”.

• Market: is executed at the prevailing market price.

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2. Next up, you need to stipulate the contract’s lifetime. Choose “End of Day”, “Fill or Kill”or “Immediate or Cancel”:

• End of Day: FNB SPM must execute the order by the end of the day "and any remainingun-executed volume must lapse". However, all orders that are not executed during the day automatically lapse at the end of the day.

• Fill or Kill: The full volume of the order should either be executed in full orthe order must lapse.

• Immediate or Cancel: If the order is not fulfilled immediately it will be cancelled.

3. ExpiryDateTime: FNB SPM does not allow trades to hold for more than a day, so the expiry time for all trades is the end the of day.

4. To edit or delete orders that have been created but not executed:

• Click “Orders” then “Order pad”.

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4.6. How to close a CFD position and institute stop-loss orders

Assuming you took a long position on Mediclinic and a short Sasol position:

• Select “Portfolio” then click “Intraday portfolio”.

• Click “Actions icon menu” (circled in amber on the example to the left).

• You will take an equal and opposite trade as per your original position to close out the position.

• If you had opened a long position, you would need to select “Sell”.

• If you had initiated a short position, click “Buy” to close your initial position.

• In this case, you sell 12 Mediclinic CFDs and buy three Sasol CFDs.

• “Contingent buy” or “Contingent sell” can be used to manage risk by setting up stop-loss orders.

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4.7. Understanding the intraday summary portfolio

This CFD portfolio is composed of a short exposure in three Sasol CFDs and a long position in 12 Mediclinic CFDs.

GLV stands for “Gross Liquidation Value”, which is the value that you realise should you choose to exit all your positions instantly. It is a live CFD portfolio value update.

In the “Summary” table, “Market Value” is the aggregate value of the underlying share exposure and is positive for a long position and negative for a short position. In our case, it is the summation of both the Sasol short and Mediclinic long positions. Under the “Holdings” table there is a column called “MktVal”, if you add the values in that column, you will get to the “Market Value” in the “Summary” table.

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4.8. Understanding your daily and monthly statementYou can download your statements by going to My Investments Derivatives Derivative Documents. Daily statements provide you with a snapshot of your portfolio and reflect the results of the previous day’s transactions. Your opening cash balance will be reconciled with your closing cash balance after accounting for all mark-to-market profit/losses, interest earned/paid and margin changes if applicable.

Monthly statements provide similar information as the daily statement, but give a monthly view of your activity. This includes a record of all deposits and withdrawals from your account.

NB: Cash balance refers to money available for trading.

CFD Trading: Advantages and disadvantages

This section provides further insight into the use of CFDs and compares them with other types of financial instruments. When CFDs are used appropriately, they add useful

tools to your trading strategy that are simply not available in traditional long-only share exposures.

This note outlines the use of CFDs advantages over other instruments, including lower transaction costs, the ability to take out short exposures in an inexpensive manner and how to use them in pairs trading strategies.

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1. Advantages

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3. Trading costs and returns

4. Day-to-day application of CFDs

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1. Advantages

Most of the advantages associated with CFDs assume that you will use them for day trading, or short holding periods. If you are building a long-term portfolio in which you will hold shares for an extended period, regular share investments are the better choice from a trading price perspective. For a long position with a CFD, the benefits are more pronounced if you trade intraday (and close out your position before the day ends) as you do not have to pay end-of-day interest.

1.1. MarginIn regular share trading you pay the full price of a share; however, CFDs offer exposure to a share at a fraction of the cost of owning it. This amount is called the margin, which is effectively a deposit paid at the start to cover the credit risk that may arise as the reference share price changes. FNB SPM determines this margin for each investor using a combination of the Safex margin rules set by the Johannesburg Stock Exchange and your risk profile. FNB SPM classifies clients into four risk categories and the higher your perceived risk, the greater the margin you are required to deposit. The four risk categories will translate to margin requirements ranging between approximately 12% and 21%.

We’ll use AdaptIT to illustrate how putting down a margin instead of paying the full share price magnifies (or leverages) your returns. Its share price closed at R8.00 on 23 January 2018 and at R10.50 on 31 January. If you had taken a CFD long position

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for that period, you would have made a holding period return of 201% compared with 31% for regular equities. Here is how it would have played out, assuming a starting market exposure of R100 000:

AdaptIT Return analysis CFDs Shares

Notional exposure R100 000.00 R100 000.00

Principal capital (assume 15% margin) R15 000.00 R100 000.00

Total trading costs for 7-day long position R546.34 R750.00

Total capital outlay R15 546.34 R100 750.00

Units bought (CFDs or Shares) 12 500 12 500

Nominal return per CFD or Share R2.50 R2.50

Total nominal return R31 250.00 R31 250.00

Holding period return (Total nominal return divided by total capital outlay)

201% 31%

Trading costs*

Brokerage R350.00 R500.00

STT R0.00 R250.00

Interest on a 7-day long position R196.34 R0.00

Total trading costs R546.34 R750.00

* We go into more detail on the trading costs on the next page.

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CFDs Shares


STT R0.00 R250.00

Interest long 7 days R196.34 R0.00


Principal capital (assuming margin of 15%) R15 000.00 R100 000.00


1.2. Lower transaction costs

Lower transaction costs are another benefit of trading in CFDs. FNB SPM’s brokerage is 0.35% of the underlying exposure compared with 0.50% for shares. There is also an additional upfront cost associated with buying shares: securities transfer tax (STT).

Furthermore, if you open a short CFD position you will receive interest at the end of the day based on the price of the underlying or reference share. However, if you have a CFD long position you will pay interest at the end of each day. The amount of interest is based on the repo rate set by the South African Reserve Bank (SARB). For a short position, you receive the repo rate less one percentage point, and for a long position you pay the repo rate plus 2.5 percentage points.

To extend the AdaptIT example above: this position had an underlying exposure of R100 000 and was held for seven days. The interest over the seven days is 9% (repo + 2.5%) for the long side. Interest is calculated based on the daily closing prices of AdaptIT for 23-31 January.

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The total cost for the CFD position is R546.34 but for the share position it is R750, while the capital outlay for the CFD is R15 000 (assuming a margin rate of 15%) and for shares it is R100 000. When taking a short position, you would earn interest rather than pay it; thus the total cost would be lower. In our example but with a short position, the interest rate would be 5.5% (repo - 1%), earning you R119.98 in interest. That reduces the total trading cost to R230.02 (R350.00 - R119.98). We will work through more examples in our next note.

1.3. Transparency and ease of executionTrading with CFDs is easier to understand compared to other derivatives, such as options and warrants, as returns directly track the share performance. One share is equal to one CFD, and you are not obliged to trade block quantities. Another factor is that CFDs do not have a maturity or expiry date, as other derivatives do.

There is another factor to CFDs should you wish to hold a long position for an extended period, which is that you receive the full dividend (also known as a manufactured payment). If you are holding CFD positions over the long run, this helps to offset interest costs.

1.4. Long and short trading exposures

With CFDs you can take advantage of both positive and negative views on the market. Normal share trading restricts retail investors to long positions with expectations of increases in the value of the shares. Please see our previous note for a full explanation of a short trade.

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1.5. Pairs trades

The ability to open both long and short positions is empowering to traders. You can select shares that are in the same industry and highly correlated, in a short and long position, and in doing so reduce market risk. This is referred to as a pairs trade.

A good example is to buy (long) Vodacom and sell (short) MTN at the same time. Here, the rationale is that you believe Vodacom is undervalued or MTN is overvalued. In theory, you will make a profit as the short position falls and long position rises, although that is not a requirement. Even if one of the legs of your pairs trade moves against you, you can still profit. For example, if both counters fall, but the price of MTN (your short position) falls faster than the price of Vodacom, you will still make a profit. The opposite also holds; if both rise but Vodacom rises faster than MTN.

The logic of the trade is not in the specific direction of price movements but the relative price movement of the two share prices. So, you can make money in various market scenarios - upwards and downwards - which is why it is also called a market-neutral trade.

In summary, compared with shares, CFDs are less capital intensive with lower upfront trading costs, yet they both have the same payoff or nominal returns profile. If a share price goes up or down by R1, CFDs also gain or lose R1. This makes CFDs more suitable for short-term trading.

Compared with other derivatives, CFDs are less complex to understand and their payoff is directly linked to the share price.

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CFDs carry a greater amount of risk than shares do, which we’ll discuss shortly.

However, the main disadvantage is that if you take a long position with a CFD and hold it for longer than a day, you have to pay interest based on the daily closing price of the underlying or reference share price. Interest is payable on the total market exposure, irrespective of the margin.

Other common disadvantages include:

2.1. Mark-to-market requirement

Mark-to-market requirement: CFDs have a collateral requirement equivalent to the margin, which means that if the position moves against you, it will reduce your cash balance in your trading account. If it is insufficient to meet your margin at the end of the day, you will be subject to a “margin call” which means you will have to deposit additional funds into the account to meet the required margin. If you are unable to meet the margin requirement your position will be closed out.

2.2. No voting rights

As a CFD investor you do not own the underlying asset, which means you have no voting rights. This should not be of concern with short-term trading as you do not intend to hold the share for the long haul.

2.3. Dividend payments

If you do hold a short CFD position when dividends are due for payment (once the dividend amount has been announced but not yet paid), you will be liable to pay out the full dividend value.

2. Disadvantages

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A full understanding of the cost structures of CFDs and how the returns work is important to help you maximise the benefits of trading in CFDs. This note delves into some of the technical issues to fully explain the sources of returns and costs.

3.1. Trading costs

As in share trading, CFD trading attracts trading costs. Let’s compare them:

• We have put the interest rate on the short position as negative becauseit reduces trading costs since you receive it.

• The South African Reserve Bank determines the repo rate (repurchase rate).


CFD trading Share trading

0.35% 0.50%

nil 0.25%

9.00% nil

-5.50% nil

Brokerage/commission/execution fees

Security transfer tax (STT)

Interest paid on long exposure (repo* + 2.5%)

Interest received on short exposure (repo - 1%)

Spread no difference

* repo 6.50%

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• The interest rate on the long or short exposure is expressed as an annual rate,but is calculated at the end of each day based on the closing value of theunderlying market exposure (i.e. closing share price multiplied by numberof the CFDs purchased).

3.2. Treatment of dividends

• If you have taken a CFD long exposure, you receive full dividends when theyare paid by the underlying shares.

• However, if you have a short exposure, you are obliged to pay dividends onthe underlying exposure. This payment happens on the day the share goes“ex-dividend”.

• CFD dividends are referred to as manufactured payments or receipts.

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3.3. CFD returns: long exposure – shorter vs longer trading horizon

The trading costs for a long CFD exposure are low relative to share trading, particularly when you open and close a long position within a short time frame. A long exposure attracts interest charges at the end of each day so the quicker you close it, the less interest you pay, which will boost your returns. When the low CFD trading costs are combined with the power of margin trading, it will significantly magnify (leverage) your returns compared with share trading.

As in our previous note, we’ll use AdaptIT (JSE Code: ADI) to illustrate how putting down margin instead of paying the full share price magnifies (or leverages) your returns. The example also compares two CFD positions that are similar in all respects except the holding period: seven days vs 365 days. (AdapIT is not part of the top 40 so FNB SPM does not offer it for CFD trades, but it illustrates the concept of returns well because it had a significant price movement in just seven days at the beginning of the year.)

The ADI share price closed at R8.00 on 23 January 2018 and at R10.50 on 31 January. If you had taken a CFD long position for that period for a market exposure of R100 000, you would have made a holding period return (HPR) of 201% compared with 31% for share trading. The significant difference in return is due to the different principal capital outlays for CFDs and shares.

The quirks of CFD trading – and this is why it is so important to understand the cost structures – mean that if you had the CFD position open for 365 days, your HPR would fall to 122% compared with 201% because the interest charges accumulate. It is thus

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very important to understand the cost structures. However, receiving a manufactured dividend can offset some of the interest charges. Here is how it would have played out:

Return analysisCFDs

(7 days)CFDs

(365 days) Equities

Notional (market) exposure R100 000.00 R100 000.00 R100 000.00

Principal capital (assume 15% margin) R15 000.00 R15 000.00 R100 000.00

Total trading costs R546.34 R10 587.50 R750.00

Total capital outlay R15 546.34 R25 587.50 R100 750.00

Units bought (CFDs or shares) 12 500 12 500 12 500

Nominal return per unit R2.50 R2.50 R2.50

Total nominal return R31 250.00 R31 250.00 R31 250.00

Holding period return 201% 122% 31%

Trading costs

Brokerage R350.00 R350.00 R500.00

STT R0.00 R0.00 R250.00

Interest long exposure (7 days vs 365 days) R196.34 R10 237.50 R0.00

Total trading costs R546.34 R10 587.50 R750.00

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Return analysis CFDs Equities

Notional (market) exposure R98 160.00 R98 160.00

Principal capital (assume 15% margin) R14 724.00 R98 160.00



Continued on next page

3.4. CFD returns: short exposure

Conversely, if you open a short CFD position, you will receive interest at the end of each day based on the price of the underlying or reference share. In this case, your returns on a short exposure benefit from having the position open for longer periods, but that also increases the possibility of paying a manufactured dividend.

In general, holding CFDs for a longer period elevates the chance of the reference/underlying price moving against your position, if you’re netting a profit. In many ways trading is a balancing act – knowing when to take profit is essential. We think it’s better to lock in profits as soon as possible when trading in CFDs.

For our example on taking a short CFD exposure we look at Naspers (JSE Code: NPN). In this case, trading costs are lower because you receive interest income at the end of each day based on the value of your market exposure. The Naspers share peaked at R4 090.00 on 21 November but fell to R3 531.62 on 1 December – nine trading days later. Assume you put down a margin of 15% (R14 724.00 for a market exposure of R98 160.00), you would open a short exposure of 24 Naspers CFDs.

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Return analysis CFDs Equities

Units bought (CFDs or shares) 24 24

Nominal return per unit R558.38 R558.38

Total nominal return R13 401.12 R13 401.12

Holding period return 90% 14%

Trading costs


STT R0.00 R245.40

Interest long exposure 9 days -R123.30 R0.00


In our examples for both long and short positions, the trades performed according to expectations. However, life is not that accommodating: if the market moves contrary to your expectations you might end up losing more than your initial capital. Please read Note 2, which details the risks of CFDs and margin trading.

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Day Date

Vodacom closing

price (R

Naked LONG CFD closing balance (R)

Naked SHORT CFD closing balance (R)

Closing market exposure (R)

LONG: Daily interest

paid (R)

SHORT: Daily interest

received (R)

Tuesday 2018/01/02 143.97 14 987.28 14 987.28 99 915.18 24.64 15.06

Wednesday 2018/01/03 141.00 12 926.10 17 048.46 97 854.00 24.13 14.75

Thursday 2018/01/04 141.50 13 273.10 16 701.46 98 201.00 24.21 14.80

Friday 2018/01/05 144.00 15 008.10 14 966.46 99 936.00 24.64 15.06

Saturday 2018/01/06 144.00 15 008.10 14 966.46 99 936.00 24.64 15.06

Sunday 2018/01/07 144.00 15 008.10 14 966.46 99 936.00 24.64 15.06

Monday 2018/01/08 144.85 15 598.00 14 376.56 100 525.90 24.79 15.15


Understanding how CFDs work, and knowing how to make the most out of them, provides you with useful tools to be a successful investor. This note focuses on the practical application of CFDs. We provide examples of naked and hedged CFD exposures and outline associated costs and payoffs. We look at long and short exposures and pairs trades.

Naked short and long exposure: Vodacom

In the following scenario, we use Vodacom to open either a long or short exposure for R99 915.18. We look at the real price action for Vodacom between 2 January and 1 February 2018. The table that follows shows daily movements in your trading account, including interest paid (long exposure) or received (short exposure).

Table 1: Naked long and short exposures

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Day Date

Vodacom closing

price (R)

Naked LONG CFD closing balance (R)

Naked SHORT CFD closing balance (R)

Closing market exposure (R)

LONG: Daily interest

paid (R)

SHORT: Daily interest

received (R)

Tuesday 2018/01/09 144.00 15 00.10 14 966.46 99 936.00 24.64 15.06

Wednesday 2018/01/10 143.00 14 314.10 15 660.46 99 242.00 24.47 14.95

Thursday 2018/01/11 141.80 13 481.30 16 493.26 98 409.20 24.27 14.83

Friday 2018/01/12 141.56 13 314.74 16 659.82 98 242.64 24.22 14.80

Saturday 2018/01/13 141.56 13 314.74 16 659.82 98 242.64 24.22 14.80

Sunday 2018/01/14 141.56 13 314.74 16 659.82 98 242.64 24.22 14.80

Monday 2018/01/15 140.71 12 724.84 17 249.72 97 652.74 24.08 14.71

Tuesday 2018/01/16 143.27 14 501.48 15 473.08 99 429.38 24.52 14.98

Wednesday 2018/01/17 144.90 15 632.70 14 341.86 100 560.60 24.80 15.15

Thursday 2018/01/18 149.27 18 665.48 11 309.08 103 593.38 25.54 15.61

Friday 2018/01/19 148.14 17 881.26 12 093.30 102 809.14 25.35 15.49

Saturday 2018/01/20 148.14 17 881.26 12 093.30 102 809.14 25.35 15.49

Sunday 2018/01/21 148.14 17 881.26 12 093.30 102 809.14 25.35 15.49

Monday 2018/01/22 146.93 17 041.52 12 933.04 101 969.42 25.14 15.37

Tuesday 2018/01/23 150.99 19 859.16 10 115.40 104 787.06 25.84 15.79

Wednesday 2018/01/24 151.69 20 344.96 9 629.60 105 272.86 25.96 15.86

Thursday 2018/01/25 157.52 24 390.98 5 583.58 109 318.88 26.96 16.47

Friday 2018/01/26 163.00 28 194.10 1 780.46 113 122.00 27.89 17.05

Saturday 2018/01/27 163.00 28 194.10 1 780.46 113 122.00 27.89 17.05

Sunday 2018/01/28 163.00 28 194.10 1 780.46 113 122.00 27.89 17.05

Monday 2018/01/29 158.97 25 397.28 4 577.28 110 325.18 27.20 16.62

Tuesday 2018/01/30 155.05 22 676.80 7 297.76 107 604.70 26.53 16.21

Wednesday 2018/01/31 163.50 28 541.10 1 433.46 113 469.00 27.98 17.10

Thursday 2018/02/01 167.16 31 081.14 -1 106.58 116009.04 - -

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When the account balance falls below the required margin of R14 987.28 (as shown by the values in amber) you will be required to deposit more money (variation margin) to bring the margin back to at least R14 987.28. Please note that any cash amounts over and above the required margin sitting in your trading account will receive interest daily, based on a rate determined by FNB SPM.

The next table shows payoffs for both a long and short CFD position in Vodacom. Returns are compared with regular share trading to highlight the effect of using a margin.

Table 2: CFD vs equity returns

Return analysis CFDs Equities CFDs CFDs

R99 915.18 R99 915.18 R99 915.18 R99 915.18

R14 987.28 R99 915.18 R14 987.28 R99 915.18

Market exposure

Principal capital (assume 15% margin)

No.CFDs/shares opened 694 694 694 694

Gross profit (-Loss) R16 093.86 R16 093.86 -R16 093.86 -R16 093.86

Trading costs* R1 111.72 R749.36 -R115.97 R749.36

Net profit R14 982.14 R15 344.50 -R15 977.89 -R16 843.22

Holding period return 93% 15% -107% -17%

Leverage 6.67x none 6.67x none

* Trading costs

Brokerage R349.70 R499.58 R349.70 R499.58

STT R0.00 R249.79 R0.00 R249.79

Interest paid (-received) R762.02 R0.00 -R465.68 R0.00

Total costs R1 111.72 R749.36 -R115.97 R749.36

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A long exposure in Vodacom would have made a profit of R14 982.14, which is equivalent to a holding period return of 93% on your capital. The “leverage” row in the table shows the number of times your profits or losses are magnified by using CFDs (margin) instead of shares.

Conversely, if you had taken a short exposure, you would have made a loss of R15 334.50. That means you would have lost all your capital and paid in an additional R990.61 to close out the short position. However, FNB SPM would not have let your position deteriorate to this level without taking action. If you had not heeded your margin calls on 23 January (marked in yellow in Table 1) when your margin fell to less than 70% of the required margin, FNB SPM would have forcibly exited your positions until your margin improved to an acceptable level. Alternatively, you could simply implement a stop-loss order to avoid complete loss of your capital.

4.1. Hedged positions: Pairs trade between Vodacom and MTN

The following example illustrates how an investor can hedge market risk by implementing a pairs trade. As we highlighted in Note 2, it is not necessary for both legs of the pair you are trading to yield a profit. What you need is for one of your positions to move ahead of the other. For example, if the price of your short position falls faster than that of your long position, you’re making a profit. Similarly, if both prices rise but your long position rises faster than your short position, you make a profit.

For our pairs trade example we initiate two positions: a long exposure in Vodacom and a short exposure in MTN. The underlying assumption here is that Vodacom is relatively undervalued or MTN is relatively overvalued. Both legs of the trade have a market exposure of R99 838.88, and the trade was opened on 2 January and closed on 1 February 2018. Table 3 reflects the opening, daily and closing positions of the pairs trade:

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Day Date

Vodacom closing

price (R

MTN closing

price (R

Vodacom Long CFD

closing balance (R)

MTN Short CFD closing balance (R)

Pairs (Vodacom +

MTN) closing balance (R)

Closing Vodacom

market exposure (R)

Long: interest paid (R)

Closing MTN market

exposure (R)

Short: interest

received (R)

Tuesday 2018/01/02 143.97 133.73 7 493.64 7 482.19 14 975.83 49 957.59 12.32 49 881.29 7.52

Wednesday 2018/01/03 141.00 132.70 6463.05 7 866.38 14 329.43 48 927.00 12.06 49 497.10 7.46

Thursday 2018/01/04 141.50 130.67 6 636.55 8 623.57 15 260.12 49 100.50 12.11 48 739.91 7.34

Friday 2018/01/05 144.00 134.72 7 504.05 7 112.92 14 616.97 49 968.00 12.32 50 250.56 7.57

Saturday 2018/01/06 144.00 134.72 7 504.05 7 112.92 14 616.97 49 968.00 12.32 50 250.56 7.57

Sunday 2018/01/07 144.00 134.72 7 504.05 7 112.92 14 616.97 49 968.00 12.32 50 250.56 7.57

Monday 2018/01/08 144.85 135.75 7 799.00 6 728.73 14 527.73 50 262.95 12.39 50 634.75 7.63

Tuesday 2018/01/09 144.00 135.60 7 504.05 6 784.68 14 288.73 49 968.00 12.32 50 578.80 7.62

Wednesday 2018/01/10 143.00 135.64 7 157.05 6 769.76 13 926.81 49 621.00 12.24 50 593.72 7.62

Thursday 2018/01/11 141.80 133.77 6 740.65 7 467.27 14 207.92 49 204.60 12.13 49 896.21 7.52

Friday 2018/01/12 141.56 133.49 6 657.37 7 571.71 14 229.08 49 121.32 12.11 49 791.77 7.50

Saturday 2018/01/13 141.56 133.49 6 657.37 7 571.71 14 229.08 49 121.32 12.11 49 791.77 7.50

Sunday 2018/01/14 141.56 133.49 6 657.37 7 571.71 14 229.08 49 121.32 12.11 49 791.77 7.50

Monday 2018/01/15 140.71 132.51 6 362.42 7 937.25 14 229.67 48 826.37 12.04 49 426.23 7.45

Tuesday 2018/01/16 143.27 134.17 7 250.74 7 318.07 14 568.81 49 714.69 12.26 50 045.41 7.54

Wednesday 2018/01/17 144.90 139.53 7 816.35 5 318.79 13 135.14 50 280.30 12.40 52 044.69 7.84

Thursday 2018/01/18 149.27 138.90 9 332.74 5 553.78 14 886.52 51 796.69 12.77 51 809.73 7.81

Friday 2018/01/19 148.14 133.55 8 940.63 7 549.33 16 489.96 51 404.58 12.68 49 814.15 7.51

Saturday 2018/01/20 148.14 133.55 8 940.63 7 549.33 16 489.96 51 404.58 12.68 49 814.15 7.51

Sunday 2018/01/21 148.14 133.55 8 940.63 7 549.33 16 489.96 51 404.58 12.68 49 814.15 7.51

Monday 2018/01/22 146.93 136.17 8 520.76 6 572.07 15 092.83 50 984.71 12.57 50 791.41 7.65

Tuesday 2018/01/23 150.99 139.16 9 929.58 5 456.80 15 386.38 52 393.53 12.92 51 906.68 7.82

Wednesday 2018/01/24 151.69 136.00 10 172.48 6 635.48 16 807.96 52 636.43 12.98 50 728.00 7.64

Thursday 2018/01/25 157.52 135.56 12 195.49 6 799.60 18 995.09 54 659.44 13.48 50 563.88 7.62

Friday 2018/01/26 163.00 134.75 14 097.05 7 101.73 21 198.78 56 561.00 13.95 50 261.75 7.57


Table 3: Pairs trade: Vodacom and MTN

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Day Date

Vodacom closing

price (R

MTN closing

price (R

Vodacom Long CFD

closing balance (R)

MTN Short CFD closing balance (R)

Pairs (Vodacom +

MTN) closing balance (R)

Closing Vodacom

market exposure (R)

Long: interest paid (R)

Closing MTN market

exposure (R)

Short: interest

received (R)

Saturday 2018/01/27 163.00 134.75 14 097.05 7 101.73 21 198.78 56 561.00 13.95 50 261.75 7.57

Sunday 2018/01/28 163.00 134.75 14 097.05 7 101.73 21 198.78 56 561.11 13.95 50 261.75 7.57

Monday 2018/01/29 158.97 133.04 12 698.64 7 739.56 20 438.20 55 162.59 13.60 49 623.82 7.48

Tuesday 2018/01/30 155.05 130.94 11 338.40 8 522.86 19 861.26 53 802.35 13.27 48 840.62 7.36

Wednesday 2018/01/31 163.50 131.40 14 270.55 8 351.28 22 621.83 56 734.50 13.99 49 012.20 7.39

Thursday 2018/02/01 167.16 132.50 15 540.57 7 940.98 23 481.55 58 004.52 - 49 422.50 -

Again, when the account balance falls below required margin (as shown by the values in amber) you will be required to deposit a variation margin. However, in this case, you should only look at the combined (pairs) position. (Individual positions illustrate what would have happened for each separate exposure.) Table 4 shows the payoff profile.

Table 4: CFD pair trade returns

Vodacom LONG CFD

MTN SHORT CFD

Pairs (Vodacom+MTN)

R49 957.59 R49 881.29 R99 838.88

R7 493.64 R7 482.19 R14 975.83

Market exposure

Principal capital (assume 15% margin)

No.CFDs/Shares opened 347 373 720

Gross profit (loss) R8 046.93 R458.79 R8 505.72

Trading costs* R555.86 -R51.92 R503.93

Net profit R7 491.07 R510.71 R8 001.79

Holding Period Return 93% 7% 52%

Leverage 6.1x 41.1x 6.7x


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4.2. Protecting (hedging) a portfolio of equities with CFDs during periods of volatility

As an investor, you might want to protect the value of your long-term holdings of shares during a period of volatility, particularly if you have a contingent payment to make or if you’re unsure whether or not the volatility will be short-lived. If the contingent payment materialises, you do not want to be forced to liquidate your portfolio at an unattractive valuation.

Opening a short CFD position equivalent to the market value (exposure) of your holding can preserve your capital. Also, the low cost structure of short CFDs positions (i.e. receiving interest income) make CFDs ideal for protecting the value of your portfolio of shares.

When you trade down your risk in this fashion, it also means you forego the upside potential of your portfolio, that is, the value of your holdings is fixed until you close the CFD position. However, you can always exit the CFD position once you are more comfortable with market direction and risk levels.

Another benefit is that you avoid high execution costs that come with the actual selling and buying of shares. Similarly, you can use the same strategy to lock in profits of your other CFD positions or other asset classes. For institutional investors to hedge their portfolios similarly, they generally use swaps (or other complex derivative structures), which are generally not available to retail investors.

Vodacom LONG CFD

MTN SHORT CFD

Pairs (Vodacom+MTN)

* Trading costs

Brokerage R174.85 R174.85 R349.70

STT R0.00 R0.00 R0.00

Interest paid (-received) R381.01 -R226.78 R154.23

Total costs R555.86 -R51.92 R503.93

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1. Advanced CFD Tradingmechanics

2. Risk level and risk management

3. Events that affect your account

4. Treatment of corporate actions

Advanced CFD trading mechanics

Advanced CFD trading mechanicsThis note provides further insight into advanced risk management tools. With CFDs you can take advantage of both positive and negative views on the market, which can be exhilarating if the price of a share moves in the direction you expected. Although it magnifies returns,it similarly magnifies losses. It is important to understand all risks involved and use the appropriate risk management tools.

This note explores long and short trading exposures, pairs trading, risk level and risk management. It is important to be familiar with all these concepts before trading.

1. Advanced CFD trading mechanics

1.1. Long and short trading exposures

With CFDs you can take advantage of both positive and negative views on the market. Normal share trading restricts retail investors to long positions with expectations of increases in the value of the shares.

1.2. Pairs trades

The ability to open both long and short positions is empowering to traders. You can select shares that are in the same industry and highly correlated, in a short and long position, and in doing so reduce market risk. This is referred to as a pairs trade.

A good example is to buy (long) Vodacom and sell (short) MTN at the same time. Here, the rationale is that you believe Vodacom is undervalued or MTN is overvalued. In theory, you will make a profit as the short position falls and long position rises, although that is not a requirement. Even if one of the legs of your pairs trade moves against you, you

can still profit. For example, if both counters fall, but the price of MTN (your short position) falls faster than the price of Vodacom, you will still be in the money. The opposite also holds; if both rise but Vodacom rises faster than MTN.

The logic of the trade is not in the specific direction of price movements but the relative price movement of the two share prices. So, you can make money in various market scenarios - upwards and downwards - which is why it is also called a market-neutral trade.

In summary, compared with shares, CFDs are less capital intensive with lower upfront trading costs, yet they both have the same payoff or nominal returns profile. If a share price goes up or down by R1, CFDs also gain or lose R1. This makes CFDs more suitable for short-term trading.

Compared with other derivatives, CFDs are less complex to understand and their payoff is directly linked to the share price.

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CFD returns can be exhilarating if the price of a share moves in the direction you expected. However, one of their advantages, which is the smaller capital outlay, is also a source of risk. Although it magnifies returns, it similarly magnifies losses. If the risk is not managed correctly, you might end up losing more than your initial capital. We illustrate this by an example of an event still fresh in the minds of market watchers.


Steinhoff’s share price had shown some weakness for months, but on 6 December 2017 things exploded and the share crashed to R17.61 from R45.65 - a 61.4% intraday loss. Let’s look at how this would have affected you if you had a long position on the share.

Steinhoff share price

8 000

Feb-17

Feb-17

Mar-17

Apr-17

May-17

May-17

Jun-17

Jul-17

Jul-17

Aug-17

Sep-17

Sep-17

Oct-17

Nov-17

Nov-17

Dec-17

Jan-18

Jan-18

Feb-18

Mar-1

8

Apr-18

Apr-18

May-1

8

Jun-18

7 000

4 000

6 000

3 000

5 000

2 000

1 000

0

Share price tanks to R17.61 from R45.65 in a single day

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The share closed at R45.65 on 5 December. If we assume that the required margin to open a long position is 15%, it means you would have to put down R6.85 as capital. But, by end of trading on 6 December, the share price had fallen by R28.04 to R17.61. According to the CFD contract, you are required to meet a “margin call” by paying the entire negative price movement. Since you had put down a margin of R6.85 which only covers a portion of the negative price movement, you would still be required to pay the outstanding R21.19, which was not covered by your margin. The loss is more than six times your capital. If, say, you had opened a position using capital of R10 000 (equivalent to about 1 460 CFDs on Steinhoff), you would end up losing more than R60 000 at the end of the day, including your initial capital.

For a long position, your potential loss is equivalent to the price of the share (when you opened the position), but if the market moves against your short position it can get really worrisome because the share price can just keep on rising. This takes us to our next point of managing your risk properly: the stop-loss order.

2.1. Stop-loss orders

FNB SPM offers stop-loss functionality on its trading platform. You can structure your trade in such a way that if it reaches a certain price, FNB SPM automatically exits your position.

2.2. Over-the-counter trading

A CFD is an over-the-counter product. That means it is not a trade made on the JSE but is a contract between you and FNB SPM. FNB SPM has an obligation to pay you your returns. It therefore means each time you trade you are also betting on the creditworthiness of FNB SPM. FNB SPM does not lose money regardless of the price of counter offers as it hedges all clients’ positions. There are thus always funds available. FNB SPM’s creditworthiness is further assured by its parent company, FirstRand.

To summarise, in CFD trading FNB SPM acts as the principal; while in share trading, it is the agent and the JSE is the principal.

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2.3. Over-trading

Ease of access and low capital requirements with CFDs can lead to over-trading. It is possible to commit a lot of capital towards CFDs relative to your overall portfolio, with the potential of depleting all your savings and leaving you in debt in the event of a significant adverse price movement. As a rule of thumb, you should allocate no more than 5% of your assets to derivatives. We highly recommend that you do get professional advice to check the proportion of your portfolio allocated to derivatives.

2.4. Setting a stop-loss

Assuming you took a long position on Mediclinic and a short Sasol position:

• Select “Portfolio” then click “Intraday portfolio”.

• Click “Actions icon menu” (circled in amber on the left).

• You will take an equal and opposite trade as per your original position to closeout the position.

• If you had opened a long position, you would need to select “Sell”.

• If you had initiated a short position, click “Buy” to close your initial position.

• In this case, you sell 12 Mediclinic CFDs and buy three Sasol CFDs.

• “Contingent buy” or “Contingent sell” can be used to manage risk by setting up stop-loss orders.

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3.1. Margin coverage ratio updates and warnings

Your margin coverage ratio is constantly updated and you will start to get warnings (via email or SMS) if it falls below 120%. If you do not make variation margin deposits and the margin coverage ratio falls below 70%, FNB SPM will forcibly exit your positions until the ratio is restored back to 120%.

Resources to help with trading ideas and decision-making


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3.2. Guidelines for liquidation on breach of margin cover

FNB SPM will apply a LIFO (last in first out) method when forcibly liquidating positions to restore margin cover ratios to 120%.

In the case of an existing position which is then amended by adding to or reducing the exposure at a later date, such transaction places the entire position as the "last trade" for the purposes of applying the LIFO method.

e.g.Buy 50 AGL on 1 July 2018,Buy 100 BIL on 2 July 2018,Sell 50 SOL on 3 July 2018,Buy 20 AGL on 5 July 2018 at 10:00Sell 20 BIL on 5 July 2018 at 13:00

Rank of trades for liquidation purposes as at 6 July 2018: 1. + 80 BIL2. + 70 AGL3. - 50 SOL

3.3. Treatment of positions when margin requirements change

Margins are updated every two weeks. FNB SPM uses JSE margin rules as a reference in conjunction with the client’s individual risk profile.

If the new margin requirement results in a shortfall on your account, FNB will alert you via email or SMS. Again, if you fail to deposit enough variation margin by market close that day and the margin coverage falls to less than 70%, FNB will forcibly exit your positions until the margin is restored to the required levels.

Margins are updated on Monday evenings and become effective on Tuesdays when the markets open.

3.4. Treatment of positions upon scrip recall

This mainly affects clients that take short positions. FNB SPM use its sister company, RMB, to borrow shares (scrip) on behalf of clients who open short positions.

If scrip is recalled by the lender and FNB SPM (through RMB) cannot find a replacement, clients will be forced out of their positions. This is an unavoidable risk when going short.

However, FNB SPM will contact each client individually to explain the process/mechanics should this be required.

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3.5. Treatment of positions when the top 60 index changes

FNB SPM provides CFD exposure to the JSE’s top 60 shares. This selection changes quarterly with the JSE review.

If you hold shares that have fallen out of the top 60 basket, you are not forced to close the position, but will not be able to take out any new positions on the share.

However, if a share does fall from the top 60 basket, there is a high probability that the initial margin requirement will increase, and you will be required to fund your account sufficiently to maintain the position.

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FNB SPM reserves the right to deal with all corporate actions in line with its policy and will endeavour to provide its clients with the full economic benefits of corporate activity where applicable.

Let’s review how some corporate actions could affect your CFD exposure.

4.1. Elective dividends

These are settled in cash on the dividend payment date.

4.2. Stock splits or consolidations

Your CFD will be split or consolidated on the date that it becomes effective on the underlying share – and your margin will be adjusted similarly. Practically, this should not change your margin requirements as only the denomination changes.

4.3. Unbundlings

The CFD will be adjusted in the same ratio as the unbundling. For instance, Old Mutual shareholders will receive one share in the new UK wealth management company, Quilter, for every three Old Mutual shares that they hold. Therefore, if you have CFDs in


Old Mutual you will receive one new CFD for every three CFDs you already own. Your margin will be realigned for adequacy of coverage and you may be asked to top up if your margin falls below the required level. However, if the new entity drops out of our coverage basket, you are not forced to close the position, but will not be able to take out any new positions on the share.

4.4. Rights offers

FNB SPM will sell the rights on the first day that they start to trade and provide you with the cash equivalent, proportionate to your position. Where there is no economic benefit to the client, FNB SPM will allow the rights to lapse. Because shares in a rights issue are usually offered at a lower price than its actual market price, for a long position CFD, you will receive the difference between the share price and the take up price. This will be the intrinsic value of the nil paid letter. For a short position it is the opposite: you pay the difference.

Overall, FNB SPM will act in the best interests of clients in any corporate action event by ensuring the full economic benefit of the corporate action, where applicable, is received.

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FNB Stockbroking and Portfolio Management, a part of the FirstRand Group. FNB Securities (Pty) Ltd (member of the JSE); FNB FSP 182, Reg. No. 1996/011732/07.

Any opinions/analysis/data contained herein are for informational purposes only and should not be considered advice (including but not limited to, financial, legal or tax) or a recommendation to invest in any security. Whilst care has been taken to ensure that the content herein is accurate, it may be obtained from sources which we believe to be reliable but is not guaranteed for correctness, accuracy or otherwise to be error-free. We do not assume liability for loss arising from errors in, or from relying on, the information contained herein, irrespective of whether there has been any negligence by us, our affiliates, officers or employees, (whether direct, indirect, consequential or inconsequential). Market and economic conditions are subject to rapid change. Any comments, opinions and analysis are rendered as of the date of publishing and may change without notice. Such changes may have a material impact on the outcome of financial instruments and may not be suitable for all investors. Past performance is not indicative of future performances. Securities involve a degree of risk and are volatile instruments. FNB Stockbroking Portfolio and Management and its affiliates disclaims and assumes no liability for any loss or damage (direct, indirect, consequential or consequential) that may be suffered from using or relying on the information contained herein without seeking professional advice.

This educational handbook was compiled in partnership between Intellidex, a South African capital markets and financial services research house and FNB Stockbroking and Portfolio Management.

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DurbanPO Box 4130, The Square, 4320 2nd floor Acacia House, 2 Kikembe Drive, Umhlanga Rocks, DurbanTel: +27 87 335 0925

Contact details

Dealing DeskPO Box 3359, Parklands, 21215 Merchant Place, 9 Fredman Drive, SandtonTel: 0800 256 256

JohannesburgPO Box 3359, Parklands, 21215 Merchant Place, 9 Fredman Drive, SandtonTel: +27 11 282 8734

PretoriaPO Box 2825, Brooklyn Square, 0075Menlyn Place, 87 Frikkie de Beer Street, Menlyn, Pretoria Tel: +27 87 335 3833

www.shares.fnb.co.zaEmail: [email protected]