Finadium Research Report
Equity Swaps, Contracts for Differences
and Single Stock Futures
This report summarizes recent Finadium research on three related derivative products in the equities markets: equity swaps, contracts for differences (CFDs) and single stock futures (SSFs). These products all offer exposure to single equities without the need to purchase the underlying shares. Customized equity swaps appear to have found their niche. Initial demand for CFDs and SSFs was driven by low transaction costs relative to the underlying, but many trading venues now have a life of their own complete with price discovery.
We look at these products from a global perspective. The UK remains the single largest CFD market due to the avoidance of stamp taxes on cash equity trades. Australia’s new exchange-traded CFD market has prospered by providing standardized trading and clearing services. In India, the explosion in single stock futures trading appears due to transparent costs and a strong local history of informal single stock derivatives trading. In each country, the cost of financing and market access plays a large role in the uses and successes of different product lines.
We analyze growth prospects for contracts for differences and single stock futures on a global basis. We see the traded value of CFDs and single stock futures rising from US$868B in 2007 to US$1.5 trillion by the end of 2010. Driving forces include greater liquidity from retail and certain classes of institutional investors, and the involvement of exchanges and other standardized trading venues. Much of this trading will be along regional lines; we expect faster growth in India than the US, for example.
Given the size and complexity of the subject matter, this report is a primer rather than a full review of each product. Finadium research subscribers interested in more information should contact their Finadium representative.
This report is 45 pages with 17 exhibits.
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TABLE OF CONTENTS
? Executive Summary
? A New Era for Single Stock Equity Derivatives
? Equity Swaps
– Cross-border swaps
– Constructing, pricing and hedging equity swaps
? Contracts for Differences
– Mechanics of a contract for differences
– CFDs on the Australian Securities Exchange
– Tracking ownership and accountability
? Single Stock Futures
– Actual and theoretical pricing of a single stock future
– Margin and financing
– Shorting with single stock futures
? Case Study: India
– The National Stock Exchange (NSE) of India single stock futures market
? Case Study: The United States
– Mechanics of the OneChicago Market
– Exchange for Physicals
– Comparing financing costs for a hypothetical US short sale, CFD and SSF trade
? Driving for Growth
? About the Author
? About Finadium