Recent events in the news

On June 16 the Central Bank of Ireland published the findings of an investigation of CFD (Contracts for Difference) and financial spread betting firms. The investigation inspected four firms and reviewed eighty files, finding that none of the CFD providers inspected were fully compliant with the EU's Markets in Financial Instruments Directive.

The main findings were:

• Insufficient information regarding a client's knowledge and trading experience was gathered
• Assessments on whether leveraged products, like CFDs, were appropriate for clients were inadequate, or not performed
• Marketing material outlining the risks and benefits of CFDs were inaccurate
• Risk disclosures did not accurately communicate the risk associated with CFDs

Head of Consumer Protection, Sharon Donnery, said that "consumers need to be made fully aware of the complexity and very high risks of CFD and financial spread betting before making investment decisions."

The current CFD regulatory environment

So how might this affect CFDs in the Asia-Pacific region?

Australia is the second-largest CFD market globally, and, although the Australian Securities and Investments Commission (ASIC) requires all over-the-counter brokers to hold a financial services licence, there are still worries that the market is largely unregulated. CFD providers are currently awaiting the outcome of an ASIC consultation paper that already covers the concerns raised in the Irish investigation - proposing restrictions on advertising and the mandatory disclosure of risk benchmarks. ASIC has also moved to ban CFD advertising on television.

As new regulation may be imminent, it is unlikely that the Central Bank of Ireland's investigation will have much of an effect on the region, but it does provide an indication of where CFD regulation is heading globally.

Managing the risks of CFDs

As CFD trading is largely unregulated, it is principally the responsibility of the CFD trader to be informed of the risks involved in trading leveraged products.

Leveraged products, like forex and CFDs, enable you to open a trade by paying a fraction of the value of the position, known as the margin. If a CFD provider has a 5% margin requirement, this means that you can open a $20,000 position for just $1,000.

This magnifies the return on your investment, but it also magnifies your possible losses, which can be greater than the original deposit.

Due to the risks of trading leveraged products, CFD providers offer a number of risk management tools, such as stop and limit orders. A stop order is when you set a level at which your trade will close automatically, should the market turn against you. This limits your losses if the market continues in that direction.

A limit order is when you set a level at which your trade will close to take a certain amount of profit when the market moves in your favour. This protects your profits in case the market turns and wipes out your potential gains.

However, the best way to manage risk is by being informed about the markets, monitoring your open positions and setting limits on the amount of capital you are prepared to lose. A good CFD provider should be able to provide information about risk management, and should accurately convey the risks involved when trading CFDs.

CFD trading offers a flexible way to trade the world's financial instruments, including over 7,000 global shares. Why not try a demo account from my favourite CFD provider? This will give you a good understanding of how to use the CFD trading platform.

Please keep in mind that CFDs and the foreign exchange are leveraged products, so it's possible to have losses that are greater than your initial investment. As CFD trading might not be suitable for all people, so please educate yourself so you understand the risks.