Q:Why are CFDs not permitted in the USA?
A: It is interesting to point out that contracts for difference are not currently permitted to by USA residents (and citizens?) due to restrictions by the Securities and Exchange Commission on over-the-counter financial instruments. This is kind of odd given they rule trading in many other markets in the global market place now and replaced much of the need to trade options for leverage, so in part it’s to protect the options market revenues in the USA I guess, and protect them from those ‘evil derivatives that will be the end of the world’, CDO’s are much safer huh. Given the current overreaction on regulations on trading in the USA it’s not expected CFDs will get the green light anytime soon as the leverage provides the potential to stuff up in spectacular fashion if you get it wrong, as in futures.
So why exactly aren’t CFDs available for trading? The main reason why CFD trading is not available to US traders is because it is against US securities law. Over the counter financial instruments, such as CFDs, are heavily regulated through legislation like the Dodd Frank Act and enforced by the SEC (Securities and Exchange Commission). This power was granted under Title Vii of the act when CFDs were defined as either a swap or securities based swap, unless otherwise excluded.
Q:Will CFDs ever be allowed in the USA?
A:Well, in the States you have the exchanges that are protected by the government and who have a very strong lobby there as well, so a private client has to trade a product traded on an exchange. Currently the USA regulatory regime excludes the availability of CFDs. The answer on whether this will change will probably be that if they do not allow CFDs, then the USA exchanges will continue draining liquidity and volume as USA equity trading moves to more favorable centers (for instance Goldman quotes US equity CFDs to some CFD providers out of London but cannot do the same for their USA clients in the States!). This when the USA prides itself on its capitalistic outlook…
Will CFDs Ever be Available to Americans?After the financial collapse of 2008 there has been a great demand for increased market regulation. Given the current regulatory environment in the United States, there are no expectations for CFDs to be available for trading soon. While regulations can always be changed or amended, until that point, CFDs will remain unavailable for US traders.
I won’t start on my tax rat but let me just say that being a USA citizen, and even worse domiciling in the USA (versus a foreign country where you get ~80K/year tax exemption), you are truly a slave to the ‘free republic’. They are going to get their money out of you one way or the other…Many people from other countries are shocked and horrified to find this out, including a friend of mine who became a USA citizen (UK expatriate) without realizing he couldn’t (legally) do the tax avoidance scheme he used to do before. He turned 10 shades of white once learning the price to pay for the (apparent) opportunities provided. Since there is no tax benefit USA traders have liquid options and futures markets (the latter of which currently has more favorable tax treatment then any other short-term instrument to my knowledge), contracts for difference are somewhat redundant although I think that the simple fact that revenue is being drained away from their exchanges may eventually lead to changes in their laws to permit CFD trading at some point…
The only exception in the USA is forex trading as there is no regulated exchange there for foreign exchange. So you can actually trade foreign exchange in the States in practically the same way that you can trade them in Europe in terms of the CFD full risk that’s involved in the product. But if you wanted to trade gold, oil, commodities or securities you have to trade them on an exchange in the USA.
Q: I know that USA residents are not permitted to do CFD trading but currently I’m in Mexico and I have a temporary residence card (green card). Could I do CFD trading?
A:Unfortunately, if you are a USA citizen or paying US tax at all then most providers wouldn’t be able to accept you as a client. However if you are paying tax solely in Mexico then this might be fine with some brokers. As such, if you are currently residing in Mexico, you will be able to trade CFDs with some brokers, but if you are moving back to the US or your main residence is in the US, you won’t be able to trade them. Some providers like CMC Markets don’t even accept clients from Mexico. Most providers won’t offer accounts to citizens, nor residents of the USA due to regulatory reasons.
FAQs
Why Are CFDs Illegal in the U.S.? CFDs are largely unregulated. They are products offered over-the-counter (OTC) rather than through exchanges. This places them out of the reach of the Security & Exchange Commission, which regulates the U.S. markets.
Why is CFD trading banned in the US? ›
In the USA, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have taken a firm stance against CFD trading. The primary reasons for the ban are concerns over the lack of transparency and the risks associated with leveraged trading.
Can you trade CFDs in the US? ›
CFDs are illegal in the US because they are an over-the-counter (OTC) trading product. OTC trading products aren't listed on regulated exchanges like the New York Stock Exchange (NYSE), bypassing US regulatory bodies. However, US traders have alternatives such as forex, options and stocks.
What is the penalty for trading CFDs in the US? ›
The consequences of trading CFDs with an offshore broker as a US resident are as follows:You may be subject to fines. The CFTC can fine individuals up to $200,000 per violation for trading CFDs with an offshore broker. You may be denied access to US financial markets.
Is CFD USA legal? ›
It's time to take a look at why CFDs are not legal in the United States. The short answer to why CFDs are not allowed in the United States is because they are against a law put forth by the U.S. Securities and Exchange Commission (SEC).
Why is Forex Trading not allowed in USA? ›
Forex Trading Restrictions and Prohibitions in the U.S.
This restriction is intended to minimize risk and volatility in the market and discourage excessive speculation.
What countries is CFD banned in? ›
CFDs are illegal in the US and Hong Kong but in other countries, they can be traded under strict regulations. In such countries as Austria, Cyprus, France, and Australia, CFD trading is legal but certain regulations are in place to protect the parties involved.
How are CFDs taxed in the US? ›
For U.S. tax treatment, CFDs are deemed to be swap contracts, with ordinary gain or loss treatment using the realization method. It's not a capital gain or loss. Like with Section 988 forex, use summary reporting of trades listing the net trading “Other Income or Loss” on Form 1040 line 21.
Do professional traders use CFDs? ›
Higher levels of liquidity
This is because there are a larger number of buyers and sellers actively participating in the market for these assets, making it easier to open or close positions at desired prices. This is another reason that CFDs appeal to professional traders.
Can you make a living from CFD trading? ›
with CFD Trading? The simple answer to this question is that yes, it's possible to make money with CFD trading. The long and more realistic answer is that you first need to hone your trading skills and have a lot of discipline, practice, and patience to do well in the market.
CFDs are attractive to day traders who can use leverage to trade assets that are more costly to buy and sell. CFDs can be quite risky due to low industry regulation, potential lack of liquidity, and the need to maintain an adequate margin due to leveraged losses.
Why do so many people lose money with CFDs? ›
CFDs are a leveraged product
This means that while you could make a potential profit if the market moves in your favour, you could just as easily make significant losses if the trade moves against you and you don't have adequate risk management in place.
Is it illegal for US residents to trade with offshore forex brokers? ›
No, most offshore forex brokers will not accept US Clients. The National Futures Association which regulated online Forex Trading does not permit US citizens to trade with offshore brokers. These include brokers such as Trader's Way and LMFX.
Why is CFD not allowed in the US? ›
Why Are CFDs Illegal in the U.S.? CFDs are largely unregulated. They are products offered over-the-counter (OTC) rather than through exchanges. This places them out of the reach of the Security & Exchange Commission, which regulates the U.S. markets.
How can I trade CFD in the USA? ›
As previously mentioned, US citizens are unable to trade in CFDs because it is against US securities law. The Commodity Futures Trading Commission (CFTC) and its overseeing institution, the Securities and Exchange Commission (SEC) both prohibit the opening of CFD accounts through domestic or foreign brokerages.
When did the US ban CFDs? ›
Post 2008, the SEC did not want to see any shady investing opportunites to persist so there is a pattern day traders rule and a ban on CFDs.
Is it legal to trade CFDs? ›
Many people criticize Contract For Difference (CFD) trading and even consider it illegal. The fact is, while CFD trading is prohibited in a small number of countries, it is legal in most countries and regions. In other words, except in countries explicitly prohibiting it, CFD trading is generally considered legal.
Is CFD trading just gambling? ›
Research and analysis are probably the two key distinctions between CFD trading and gambling. Whereas CFD trading is heavily based on extensive monitoring of markets and understanding data, gambling is not.
Why do so many people lose money trading CFDs? ›
CFD Traders Reducing risk exposure
By failing to adopt certain risk management techniques and simply opening trades without protecting their trades with take-profit and stop-loss orders, they risk losing all their trading funds.
