CFDs - Sean Quinn

Stabshauptmann

Hi,

I'm having difficulty getting to grips with CFDs and how they relate to the Sean Quinn - Anglo fiasco. Perhaps someone here can plug the gaps for me:

The media repeatedly reports Quinn has a 25% stake in Anglo via CFDs.
A CFD isnt a stake in a company though, neither party in a CFD needs to own the shares they are speculating on.

I also keep hearing how the Golden Circle bought shares in Anglo that Quinn needed to off load, and there is the whole legal issue about Anglo lending money to people to buy their own shares. When and how did Quinn's CFDs transform into actual shares?

The BBC reported that "But when the Anglo Irish Bank share price nosedived Quinn was in trouble. He was hit with a series of 'margin calls' which meant he had to keep putting up more and more of his money. Eventually things got so bad he had to crystallise his losses by buying the shares outright"

I'm trying to work this out. How would buying the shares put a stop to the CFD?
The only way I see this working is if the counterparty to the CFD owned the share and a call option was embedded in the CFD.

Sorry if this is the wrong forum, I couldnt find a finance forum.

srsly78

If he refuses a margin call they can liquidate his position - forcing him to buy the share. Boilerplate stuff for equity derivatives. As you say, it's a call option embedded for when they refuse margin calls.

http://en.wikipedia.org/wiki/Contract_for_difference

Note that CFDs are OTC derivatives - ie they are a custom deal made between 2 parties. This is as opposed to a standardised instrument traded on an exchange. As such the two parties could have agreed to anything at all.

We can't really comment on what the exact terms in the subject CFDs were unless we could read the contract itself. We can guess tho!

Stabshauptmann

Cool, embedded option (probably). Thanks.

You say thats pretty normal stuff, though it seems contrary to what I always thought were the main advantage to a CFD - no one needs to own the actual share.

I always thought that you just put a stop-loss on it and that was that. I've bought CFDs online (granted on an infinitesimally small scale compared to Quinn) and there was never any question of my buying the shares.

srsly78

There is no standard CFD. The ones you bought online could be different from the ones Sean Quinn bought.

Sure they could have the basic stuff in common but god knows what additional clauses could be added on.

noodler

http://www.independent.ie/national-news/just-three-letters-cfd-at-centre-of-shares-controversy-1644972.html

At one stage in 2006 up to half of all Irish share trades were done in CFDs
The convoluted tale of Sean Quinn and his shareholding in Anglo Irish Bank has thrust CFDs into the limelight. Just what are these previously arcane financial instruments? Diane Walshe tells you everything you need to know.

• What in God's name are CFDs?

Contracts for difference (CFDs) are a contract between a buyer and a seller where the seller agrees to pay the buyer the difference between today's share price and the share price at some date in the future.
If the share price rises then the buyer receives the difference from the seller at the due date. However, if the share price falls then the buyer must pay the shortfall to the seller.

• Why not just buy shares instead?

Anyone buying shares must pay 1pc stamp duty. While that may not seem like an awful lot when your name is Sean Quinn and you are lashing out €1.5bn, it's still €15m. Even for a one-time billionaire that's serious money.
However, there is no stamp duty payable on CFDs, which would have saved Quinn €15m. This significant stamp duty saving meant that CFDs became a very popular way of trading shares. At one stage in 2006 up to half of all Irish share trades were done in the form of CFDs.

• Surely it wasn't just the desire to save €15m that prompted Quinn to opt for CFDs instead of plain old-fashioned share purchases?

The stamp duty saving isn't the only advantage CFDs enjoy over buying the underlying shares. By using CFDs Quinn was also able to bypass Stock Exchange disclosure requirements that all shareholdings over 3pc be revealed to the market.
By using CFDs Quinn was able to accumulate an effective 25pc shareholding without anyone being any the wiser. By allowing investors to bypass the Stock Exchange's disclosure requirements,CFDs permit investors to build up huge effective stakes in publicly-traded companies without moving the price in a way that straightforward share purchases would.

• I'm still not convinced that CFDs make more sense than share purchases.

Back in the good old days, before the credit squeeze when credit was cheap and plentiful, brokers would sell you CFDs by putting down as little as 5pc to 10pc as an initial outlay.
This means that Quinn's estimated €1.5bn-plus punt on Anglo could have cost him as little as €75m up front. Throw in the stamp duty saving and hey presto CFDs are a game everyone can play.

• Are there any disadvantages to using CFDs?

You bet. As with any leveraged product CFDs are great when markets are rising but when things go wrong they can go very wrong indeed. Just ask Sean Quinn. While initial outlay was relatively modest the same can't be said about his losses, which have been estimated at over €1.5bn. Even for a billionaire that's serious spondulicks.

• Will we be hearing more about CFDs in future?

CFDs' best days are almost certainly behind them, at least for the time being. The credit squeeze means that brokers now insist on much higher margin requirements, often up to 20pc.
Following the use of CFDs to bypass disclosure requirements, most stock markets are preparing to tighten up their regulations to close the CFD loophole.
This makes CFDs much less attractive vis-a-vis shares than they used to be. While we almost certainly haven't heard the last of CFDs, they have largely gone into hibernation until credit markets re-open for business.

That was an Indo example back in 2009.

One thing though, just because the share price went down (and so Quinn had to pay out rather than recieve) - does it always mean he has to buy the shares?

I mean, would the shares not have stayed in the hands of the orginal owners no matter the result of the CFD contract?

srsly78

noodler wrote: »

One thing though, just because the share price went down (and so Quinn had to pay out rather than recieve) - does it always mean he has to buy the shares?

I mean, would the shares not have stayed in the hands of the orginal owners no matter the result of the CFD contract?

We don't know what additional clauses were in the contract, but we can guess there is a "default" option in it if the client refuses a margin call.

Stabshauptmann

noodler wrote: »

http://www.independent.ie/national-news/just-three-letters-cfd-at-centre-of-shares-controversy-1644972.html



That was an Indo example back in 2009.

One thing though, just because the share price went down (and so Quinn had to pay out rather than recieve) - does it always mean he has to buy the shares?

I mean, would the shares not have stayed in the hands of the orginal owners no matter the result of the CFD contract?

This is a real pet peeve of mine. Why did you feel the need to post this? It added nothing to the thread. Both srsly78 and I clearly know what CFDs are. The question is how these were converted into shares, and you yourself end your post with an admission that you have the same question I did.

Did you read the thread at all before you posted?

noodler

Stabshauptmann wrote: »

This is a real pet peeve of mine. Why did you feel the need to post this? It added nothing to the thread. Both srsly78 and I clearly know what CFDs are. The question is how these were converted into shares, and you yourself end your post with an admission that you have the same question I did.

Did you read the thread at all before you posted?

First of all, you seemed to be grasping together the the general nature of CFDs so I thought the extra information would be informative.

Specifically here:

Stabshauptmann wrote: »

I'm having difficulty getting to grips with CFDs

Primarily though, I was addressing srsly78 with a specific point in the Indo piece about whether or not Quinn would always be required to buy the shares in a CFD or if it was another variable aspect of CFDs.

Why you felt the need to post that is beyond me though - life is too short for pet peeves such as yours.

Stabshauptmann

noodler wrote: »

First of all, you seemed to be grasping together the the general nature of CFDs so I thought the extra information would be informative.

Specifically here:[I'm having difficulty getting to grips with CFDs]

Like I said, read the thread before you reply. It shows up a poster's intelligence, or lack there of, when they think they are being "smart" by misquoting or selectively quoting another.

"I'm having difficulty getting to grips with CFDs and how they relate to the Sean Quinn - Anglo fiasco. Perhaps someone here can plug the gaps for me ...When and how did Quinn's CFDs transform into actual shares?"

Very different when not selectively quoted :rolleyes:

Primarily though, I was addressing srsly78 with a specific point in the Indo piece about whether or not Quinn would always be required to buy the shares in a CFD or if it was another variable aspect of CFDs.

By quoting an entire article. How helpful :rolleyes:

Why you felt the need to post that is beyond me though

In the hope that you, and any others reading this, will put more effort into posts in the future and raise, rather than lower, the information:noise ratio. Simples.

noodler

I am pretty sure I can have my posts at any length I want and ask a poster any question I want.

Simples as you might say (although I will abstain from the rather childish overuse of "rollie-eyes").

Stabshauptmann

Stabshauptmann wrote: »

This is a real pet peeve of mine. Why did you feel the need to post this? It added nothing to the thread. Both srsly78 and I clearly know what CFDs are. The question is how these were converted into shares, and you yourself end your post with an admission that you have the same question I did.

Did you read the thread at all before you posted?

To be honest, I didn't and I found the information interesting.

Park Royal

I may have missed this ...but who was Sean Quinns .........CFD provider ?

Tombo2001

Stabshauptmann wrote: »

I also keep hearing how the Golden Circle bought shares in Anglo that Quinn needed to off load, and there is the whole legal issue about Anglo lending money to people to buy their own shares. When and how did Quinn's CFDs transform into actual shares?

The BBC reported that "But when the Anglo Irish Bank share price nosedived Quinn was in trouble. He was hit with a series of 'margin calls' which meant he had to keep putting up more and more of his money. Eventually things got so bad he had to crystallise his losses by buying the shares outright"

I'm trying to work this out. How would buying the shares put a stop to the CFD?
The only way I see this working is if the counterparty to the CFD owned the share and a call option was embedded in the CFD.

Sorry if this is the wrong forum, I couldnt find a finance forum.

The BBC has it wrong here......well they have it right and wrong at the same time.

To crytallize the loss on the CFD, he would have to sell the cfd position. There is no other way to do it.

What happened here presumably is that he (i) sold the CFD exposure (thereby crystallizing the loss on the CFD) and (ii) simultaneously bought the underlying shares (thereby creating effectively the same position he already had, but in a different form).......

The net effect being that he didnt crystallize his loss at all.......if view the original investment as being the purchase of 25% of Anglo.

Its pretty clear that he bought a position that he just couldnt sell, where there was no liquidity to sell. Which is straight from page A of dumb ass stock investing.

In other words, the only way the CFD provider could close the position was if Quinn himself bought the position from them......otherwise they just couldnt sell the shares.

Tombo2001

Stabshauptmann wrote: »

This is a real pet peeve of mine. Why did you feel the need to post this? It added nothing to the thread. Both srsly78 and I clearly know what CFDs are.

A bit of courtesy wouldnt go amiss......in your OP you did say, and I quote, "I'm having difficulty getting to grips with CFDs"

Tombo2001

Park Royal wrote: »

I may have missed this ...but who was Sean Quinns .........CFD provider ?

Any / all stock brokers.....

Doesnt really matter.......he made the purchase, they were the 'shop'