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Why Contracts for Difference Are Back Under Scrutiny

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Contracts for difference, or CFDs, have hastened the demise of an Irish bank, triggered alleged Ponzi schemes in Chile, featured in a $100 million U.S. insider-trading racket and seen echoes of their use in the implosion of Archegos Capital Management. They’ve also spooked regulators because of the risks they pose to retail investors, sparking tighter rules in the U.K. and European Union. But new regulations didn’t stop amateur traders flocking to CFDs in 2020 as a result of volatility during the pandemic, and again in 2021 as part of a surge in retail interest in global markets.

It’s a financial product known as a derivative that allows an investor to make a bet on the direction of stocks, currencies or commodities without owning them. Its value is reliant on or derived from an underlying asset or group of assets. It’s traded directly between counterparties, rather than through a public exchange. While such instruments are commonplace among traders at banks and asset managers, what makes CFDs unusual is that they’re also accessible to retail traders across the globe -- except in the U.S., where they’re banned other than for financial professionals.