Dáil Éireann Debate, Wednesday - 10 October 2007
171 Deputy Pat Rabbitte asked the Tánaiste and Minister for Finance his views regarding the incidence of resort to contracts for difference in the stock market here; his plans to outlaw the use of CFDs; and if he will make a statement on the matter. [22941/07]
Amharc ar fhreagraAs the Deputy will be aware, Contracts For Difference (CFDs) relate to taking a position on the future movement of a price, either up or down, of a share, a commodity or an index such as a stock market index. There is nothing inherently wrong in this, and appropriate use of derivative products such as these by sufficiently sophisticated investors can help to provide liquidity and depth to the market in Irish equities.
At present, few Irish authorised investment firms actually write CFDs. Most investors who are dealing in these products do so with UK authorised entities. The investors may carry out these dealings through Irish stockbrokers or investment firms, who would act as introducing brokers. On the other hand, it cannot be excluded that they may deal through UK brokers or directly with the underwriter, in which circumstances, it is clear that, in practice, the specific oversight of this activity by the Irish Financial Regulator is limited.
However, I would like to assure the Deputy that, financial CFDs will be regulated as from 1 November next under the new Markets in Financial Instruments Directive (MIFID) regime as they are classified as "financial instruments" under Part 3 of Schedule 1 of S.I. No. 60 of 2007. Therefore, from that date, financial spread contracts, such as on specific shares, bonds or indices of shares, will become a regulated activity and firms providing this service will have to be authorised.
Irish authorised firms will have to comply with all the requirements, including the rigorous client protection requirements, set down in S.I. No. 60 of 2007. Investment firms will have to categorise clients as either "retail" or "professional" investors. They will have to perform suitability and appropriateness tests for clients and potential clients, taking account of the knowledge and experience of the client, outlining the specific risks associated with particular types of financial instruments. Clearly, as they are regarded as a high risk activity, the specific risks associated with CFDs will have to be highlighted prominently.
Spread betting on matters other than on financial instruments, e.g. on sporting events, is not covered by the MIFID or the transposing Regulations and thus will not be regulated under the new regime as from 1 November next.
These financial instruments are now a widely established feature of market activity across several continents and can serve a useful purpose in the market. Since they are shortly to be formally regulated across the EU under the MIFID Directive, it would neither be feasible nor appropriate for Ireland to outlaw such activity.
There are no firm statistics on the extent of CFDs in the Irish market available at present. However, when the new regime comes into force on 1 November next, under S.I. No. 60 of 2007, firms will have to comply with detailed reporting requirements for transactions and the Financial Regulator will be in a position to collect data on the incidence of FCD activity.
