unlimited losses on spreadbet on indexes

[ANDRE17]

Hi there . Say Im long the dow in £100 a point I need an ntr of £100 per £ and some variation margin. So I have 10 K in the account -- 5 k for the ntr and 5 k for up to 50 pips loss and I put a s/l in at say a 40 pip loss . Then while Im asleep overnight there is a 9/11 or Black monday 1987 and the dow drops 3000 pips ! Assume my s/l isnt done what happens ??

Im ****** ! The spread company liquidates my account because there is no more variation margin . I cannot afford the 300k loss !! How enforceable are these bets ? Ive got a Cap spreads acc and their ntr is lower plus they only are open between 7am and 9.15 pm so they wouldnt do anything with a s/l if it was outside their hours . If i dont pay and they have hedged the position ? They could go bust especially Capital who are worth about 30 mio cmc are about 25 bigger but even so . Has anyone thought about this ?

Same applies to futures markets which are closed some of the day i.e. ftse ?
cmc do a contolled risk bet ( not the others i think ) but premiums are high and I wouldnt think people take these bets unless they have a cable position before NFP or have BT shares just before their finals are announced ! Your comments would be appreciated -thank you

 

[in2uxs]

I've a CMC account and with CMC you have to fund it originally with at least £2000. If your bank goes below £200 then they automatically liquidate all your assets. Therefore you can only lose what you've got in your CMC bank.

 

[ANDRE17]

Thanks for the reply --I would need 10k ntr plus some sort of variable with cmc not 5k as i said. Capital spreads would be 5 k initial and would need some margin aswell . If i put a stop in with cmc for instance at 40 pip loss I would need 10k plus another 4k at least , Say i have 20k in the account and the market just collapses and goes thru my stop they will use the whole 20k but say the loss when the stop gets found is 300k that cant be the end of it ??
Yes they close the account but they are still out of pocket by 250k+ --- If it was the other way round and the market went up 3000 poinyts I would expect them to settle --and they should if it was hedged . The downside is always the risk -- there is no chance of anything making it go up huge -- not even if Al Quedas said they promise to never even think of attacking anyone ever again ! So my question still is -- if your account runs out of money on a plunge and they close your account -- is that the end of the bet ? thanks

 

[dcraig1]

I've a CMC account and with CMC you have to fund it originally with at least £2000. If your bank goes below £200 then they automatically liquidate all your assets. Therefore you can only lose what you've got in your CMC bank.

Hmmmm. I don't think your liability is limited to your account. The OP is talking about a black swan event. In such a case it may not be possible to liquidate positions in an orderly manner. Their disclaimer or terms of use or something like that used to say something about unlimited liability. I find it hard to believe that still isn't the case.

 

[Jack o'Clubs]

Just looking through my IG T&Cs, there is a clause saying 'if any loss or debit balance exceeds all amounts so held, you must forthwith pay such excess to us..." My assumption is that if your account is wiped out before the position is closed then you will owe your CFD / spreadbet provider the balance.

 

[ANDRE17]

Thanks for the reply jack o clubs -- yes the position is 1.2 mio and the account balance is unrealistic as l outlined I agree --- so lets say i have 50 k in the account -- I need 10k for initial margin and i put my s/l in at 40 pips -- say 4k so there is sort of 36 k left but then the market drops without s/l being done because there is chaos and my loss is sort of 300 k -- they close my account --- what happens to them if they have hedged it -- if they havnt its not such a problem -- whats my liability ? thanks

 

[ANDRE17]

Ive just read your new answer --- sorry my post was to your previous one ! thanks
So you could see punters going bankrupt and s/b on the back of their defaults --- which could happen at the cbot or other exchanges because their initial margins etc are higher but would not cover 1000 pip+ collapses -- Im not sure alot of punters / traders have thought about this !

 

[Jack o'Clubs]

Andre,

Yes I deleted my previous post as I saw that your example was hypothetical rather than literal!

Actually, your question has prompted me to have a better look at some of the T&Cs I've agreed to.. and there are all sorts of interesting bits in them: for example:

CMC - your client monies aren't segregated and you're classed as a general creditor of CMC. I hadn't realised that...

Oh, and CMC also state that 'the Customer remains liable for the full debit balance on the account'.

 

[ANDRE17]

Capital spreads say the account is segregated and it apprears they would sue you for any shortfall and you could sue them if you had a "winner" and they didnt pay ! Ive got an acc with them and cmc -- what you say about cmc and you having to honour the bet sounds about right--- I doo remember a few friends getting into ****e back in 1987 and them paying over 20k for losses ( alot then and stil is ! ) They paid up so presumably they were intimidated/threatened ! I didnt ask the full details at the time
If you have a controlled risk bet with cmc you get round this but who wants to pay 4 pips on the ftse rather than 2 or 8 on dow instead of 4 etc etc and then you have to pay another pip or so per day exra rollover costs ! But even on the futures you would still have to stump up --there is no way round this unlimited liability -- its b not really a problem on a short bet ( not many products jump upwards in huge -- maybe gold I suppose or fx after NFP but stockmarkets 2-3 % tops really

 

[ANDRE17]

The premiums are high for a one in 5-10 years scenario. Even if it happened and you are safe-- no extra liability but other dealers lose a load and default ?? ! cmc goes bust and you are a general creditor as your account is not segregated --so you lose your acc balance anyway -- well maybe get a bit back from the FSA years later ! --Nice scary scenarioo

 

[ANDRE17]

Hi jack o clubs --I found this on cmcs risk warning -- I cannot seem to find their t7c page


Your bookmaker is required to hold your money in segregated trust accounts in accordance with the regulations of the Financial Services Authority, but this may not afford complete protection.

 

[Jack o'Clubs]

That's interesting - the rules for 'bookmakers' must be different. I was looking at their CFD T&Cs which were pretty explicit abotu your status as a general creditor.

 

[in2uxs]

Good points - worrying - but good points all the same.

The first thing any trader learns along the painful journey of investing is not to get too highly leveraged in the first place. £100 a point is just a ridiculous amount of leverage if you only have £10,000 or so in your bank. It's this "greed for cash" that is more akin to gambling than investing and how many gamblers win long term ... not many.

The thing is if you have £10,000 in your bank and you buy the ftse at £100 a point, and by some chance you guess correctly and it goes up 50 points you sell having made £5,000. The next day you do the same at 200 a point and so on ... it only takes one black day when you guess the market wrong and you're wiped out.

That still doesn't answer your question I know. I guess in a market collapse the CFD company can face possible ruin.

The aim of a CFD companies is to balance out the long and short positions in all their positions. If the market collapses out of hours then he going long is bound to get sold up before he going short thereafter every £1 earned by Mr short guy is coming out of the pockets of the CFD company. Unless such companies have insurances or have other ways of generating a hedge in hostile markets then I guess during a market collapse it looks as if a few of them would go bankrupt. Whether we would be classed as debtures is another matter. Depends how things have been worded in the t&c I guess.

Banks, companies, individuals, go bust in mean times so I suppose CFD companies are not immune either. A good market collapse sifts out the good from the bad.

 

[dc2000]

an interesting topic I recently read some T&C of a spreadbet company and what was interesting was that in the event of a major fall, a 9/11 or just a market collapse black Monday type affair, if you were on the wrong side of it they would liquidate the account and you would be responsible for any loss incurred in excess of your account now here's the kicker if you were on the right side of it they have the right to close the bet at a price before the fall or even void the bet altogether

 

[ANDRE17]

Maybe so ---my scenario was just an example --- realistically someone betting 100 a pip ( and there are many I am told ) may have a balance of say 50k --- 10k initial plus 40k for losses -- so if the s/l wasnt taken out he could clock up 400 pips loss before wipe out but if it moved 1000 pips he would need to find another 50k --it seems you would be sued for the 50k and persued vigorously for it ! -- the point is -- you have unlimited liability ! but even if you paid up others wouldnt and maybe the betting co would go bust -- whether you had a contolled loss or not its a gloomy subject but needs thinking about !

 

[ANDRE17]

dc 2000 -- your joking !! -- I know your not but ......... . It gets to the point when --is it worth it with all the dangers --- but then people take a chance crossing the road etc as theyy say -- life is a danger

 

[Jack o'Clubs]

an interesting topic I recently read some T&C of a spreadbet company and what was interesting was that in the event of a major fall, a 9/11 or just a market collapse black Monday type affair, if you were on the wrong side of it they would liquidate the account and you would be responsible for any loss incurred in excess of your account now here's the kicker if you were on the right side of it they have the right to close the bet at a price before the fall or even void the bet altogether

That's right - most of them can invoke a force majeur clause which means all bets are off (except the losing ones, I would guess....)

 

[in2uxs]

Doesn't the ftse freeze at -200 points to stop panicking selling??

If so then only trade the ftse. Most you can lose is -200 points a day.

 

[ANDRE17]

there are stop trading --limit downs on ftse and dow i think so there is an "ordily" market but thats for margin call time I think -- for an hour or so then it opens and collapses again etc etc --i dont think this means there is a BIG stop at these points because people may want to sell even lower ! Anyone know k how it works pleaase ?

 

[Jack o'Clubs]

Going back to the original question, some time ago I was at a 'free seminar' sponsored by CMC, and their guy told an amusing anecdote about some muppet who'd blown up in a big way, and he added parenthetically that they were still pursuing him through the courts to reclaim the full extent of the losses he incurred (ie above and beyond his deposit/margin with them).