Volatile markets bring rise in cost of CfDs

Investors in contracts for difference (CfDs) are facing steep rises in the costs of taking out the controversial derivatives as the markets swing wildly, and they could face another round of cost hikes if conditions become worse.

Market participants fear more firms could follow MF Global, which lifted margin requirements to 90 per cent earlier this year, well above the usual rate of up to 25 per cent. Others predict some smaller companies could collapse altogether.

Contracts for difference are a way of benefiting from share price movements without owning the stock, and are used largely by hedge funds. An investor can gain access to thousands of shares, paying as little as 5 per cent of the underlying value as collateral. This investment is known as the margin.

Joshua Raymond, market strategist at City Index, a firm that offers CfD trading, said: "Margins have gone up across a lot of the industry. It is a sign that the markets are more volatile."

Earlier this month, the Financial Services Authority announced investors will have to disclose CfD holdings of above 3 per cent in a company, to avoid stealthy stake building in the previously unregulated areas.

A spokeswoman for TD Waterhouse, which offers CfD products to retail investors, said there had been a general move upwards this year, from the minimum requirements of 5 per cent.

Companies demand more margin when the markets are at their most volatile to protect against the risk of margin calls and default.

A spokesman for IG Index, another CfD provider said the last major hike in margin levels occurred in January after a sell-off in the markets. He added that while IG hadn't yet carried out further hikes, "we could be heading that way if the markets carry on as they are."

Most companies give at least three working days to hike margins, but as conditions worsen some will be forced to do it without warning, experts warned. This could lead to stocks being dumped on the markets as investors are unable to meet capital requirements, causing the underlying share price to swing.