![]() ![]() ![]() “It’s kind of like being able to go into a naked position,” she said, referring to naked bets where investors use derivatives to gain exposure to an investment without owning the underlying asset. “Extremely risky,” is how she characterized CFDs. ![]() but their usage in other regions, particularly Europe, may be something that regulators weigh as they monitor this margin-call situation, Amy Lynch, a former SEC regulator and president of FrontLine Compliance, told MarketWatch in a Monday-afternoon interview. said they could incur substantial losses related to major liquidation trades but didn’t name Archegos.įell over 16% on Monday, a record single-day drop, while Credit Suisse’s U.S.-listed stockīig banks hedge their exposures to such CFD bets by buying at least a part of the actual shares in the market.ĬFDs aren’t legal in the U.S. On top of the leverage, sources reported that Hwang may have been able to obscure his investment fund’s exposures by using multiple banks to execute the firm’s trades.Ĭredit Suisse Group AG and Nomura Holdings Inc. Margin is the amount of money a trader must initially pony up as collateral when taking positions, and a margin call occurs when the market goes against such leveraged bets, forcing the investor to deposit more cash or securities to cover losses. That allows building big positions very rapidly without a lot of market impact,” he said. “This means that you can get a position worth $1 million and only need $200,000 in margin. The analyst explained that CFDs are leveraged bets, where investors can use borrowed money at a fraction of the cost of the underlying asset, “typically around 10-20% depending on the volatility of the underlying market.” Unwinding of positions by Archegos reportedly caused sharp drops last week in many stocks, including ViacomCBS Inc. “If the price went up the seller pays the buyer the difference, and vice versa,” the analyst wrote. At the end-date, or earlier if they decide to unwind the position beforehand, only the difference between the actual and the agreed price will be settled.” The buyer and the seller agree on the price of a transaction sometime in the future. “It works much like a futures contract on, say, an index. Robertson founded the prominent investment firm Tiger Management in 1980 and his investment scions are referred to affectionately as Tiger Cubs.ĬFDs are a kind of derivative instrument that allow traders to place a directional bet on the price of a security without actually buying or selling the underlying instrument, Julius de Kempenaer, senior technical analyst at , explained to MarketWatch via email. According to Bloomberg News, contracts-for-difference, or CFDs, were at the heart of some of the “unprecedented” trades executed by the former protégé of hedge-fund titan Julian Robertson. ![]()
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