Wednesday, September 23, 2020

BSE mulls over CFDs to help illiquid market

In a move aimed at bringing liquidity into the market, Botswana Stock Exchange (BSE) expects to launch a new product into the market that will target institutional and retail investors.
The stock market said after the experience of listing NewGold ETF, it is starting a process of creating a Contract for Difference (CFD) that could take a year to finalise.

“By introducing CFDs in the BSE, we will be allowing investors to speculate on the rise or fall of the BSE-listed securities, without the need for ownership of the securities,” Thapelo┬áTsheole, head of Product Development at BSE told The Telegraph.

“CFDs are leveraged instruments; they offer potential for high returns from a smaller initial deposit unlike investing directly which does not offer such an advantage. However, it is also important to understand that the use of leverage can lead to large losses as well as large gains,” he said.

BSE with the help of Absa Capital last week listed NewGold ETF and the CFDs will leverage on the success on the gold debenture.

A CFD is an agreement between a buyer and a seller to exchange the difference in value of a particular instrument for the period when the contract is opened and when it is closed.
The difference in value is determined by reference to an underlying, which can be a share, a bond, an index, foreign exchange rate or a commodity.

The product makes it possible for an investor to participate in the performance of the underlying instrument without necessarily owning it.

“CFDs allow investors to benefit from a change, positive or negative, in the price of the underlying without having to pay the full price of the underlying instrument,” added Tsheole.

The products are becoming popular because of leverage, the ability to go short, investors do away with the disadvantages of stock ownership and investors are able to take a view on any market direction.

There are currently no listed CFDs in SADC or even in Africa and the best model for the BSE is the Australian model of trading listed CFDs.

BSE has started the process which will involve looking at regulatory issues like they did with ETFs.
The stock market has no timeline for the listing of the product, but with the experience of listing the Gold ETF Tsheole said, ” I will say a year will be adequate.”

The process will also need public education.

The flipside of the CFDs is that because they are leveraged financial instrument, therefore they carry high level of risk.

The fact that they offer exposure to an underlying security with small cash means that they can have magnifying potential gains or losses.

Investors in CFD maybe involuntarily closed out due to a variety of circumstances including a situation where funds in margin account are insufficient to meet a margin call or as a result corporate action on the underlying security.

 If the market moves against a position and margin levels are increased, the holder of that position maybe called upon to pay additional funds on short notice or within the time prescribed to maintain the position.

Therefore, the burden is on the investor to always provide sufficient funds in the account to cover for any possible market movement.

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The Telegraph September 23

Digital edition of The Telegraph, September 23, 2020.