CFM50380 - Derivative contracts: relevant contracts: contracts for differences
CTA09/S582
Definition of ‘contract for differences’
The term contract for differences (often abbreviated to CFD) is defined as a contract the purpose or pretended purpose of which is to make a profit or avoid a loss by reference to fluctuations in
- the value or price of property referred to in the contract, or
- an index or other factor designated in the contract.
Swaps will fall within the definition of contracts for differences, as will cash-settled futures and options. See examples at CFM50390.
A contract that may lead to entry into a swap (a ‘swaption’), will itself be a contract for differences. There can be no physical delivery, so it cannot be an option within S579 - see CFM50320.
The term ‘index or other factor’ in the definition of a CFD is very wide (CTA09/S582(3)). Any variation in any matter, to which a numerical value can be attributed, can form the basis of an index. The index does not have to be a pre-existing index, such as the FTSE 100 index in example 2 (CFM50390). It can be created specifically for the purposes of the contract.
As in the Leslie case (see below), a financial spread bet, if entered into by a company, will also be a contract for differences. It would be unusual for a company to place such a bet - most companies are likely to be prohibited by their Memorandum and Articles of Association from out-and-out gambling. But if it does so, the fact that the contract may represent a wager does not of itself mean that CTA09/PT7 does not apply.
City Index Ltd v Leslie
The definition of CFDs is modelled on that applicable for financial services regulation, to be found in article 85 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) and should be interprered in a similar way.
CFD is a term that has been consideredin the Courts. In essennce, a CFD is a contract whose value depends on something else but is not simply a wager.
The issues were considered by the Court of Appeal in the case of City Index Ltd v Leslie (1991, 3 All ER 180). Mr Leslie entered into “spread bets” over share price indices and, after some initial profits, rapidly lost a considerable amount of money. He tried to escape liability by claiming that his debt to City Index Ltd was a non-enforceable gaming loss. However the Courts concluded that the spread bets were “contracts for differences”, either under their commercial meaning or by virtue of their ‘pretended purpose’ of securing a profit or avoiding a loss.
Excluded contracts
There are, however, a number of exclusions from the definition of a CFD to prevent overlap with other concepts. See CFM50400.