CFDs (Contracts for Difference) are banned for trading in the USA. The main reason for this is as follows: Contracts for difference are Over-the-counter (OTC) derivatives, meaning they do not pass through regulated exchanges. This is seen by the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) as a reason not to allow CFD trading. In the US, many over-the-counter markets are heavily regulated by the Dodd Frank Act, and enforced by the SEC.
To elaborate on this, over-the-counter transactions are difficult to regulate by their nature and as such, they are seen as risky by the SEC. This lack of transparency of over-the-counter markets is given as a reason for their illegality in the US. CFDs involve exposure to high levels of leverage, which can get the unprepared trader into trouble very quickly.
One more regulated and standardized alternative way to trade CFDs is to use exchange-traded CFDs such as ASX CFDs here in Australia (see here for more information on ASX CFDs). It could be said that traders and speculators have voted with their feet, however, as they have largely proved unpopular when compared to the more widespread and bespoke over-the-counter CFD market in Australia.
Although they are banned in the US, many other countries do have access to legally trade CFDs, and there is a very healthy market for the trading instruments in countries such as Australia, the United Kingdom and Germany among others. CFDs are inherently risky, but these risks are always fully disclosed by CFD providers (check out more about CFD Brokers at this link). If the risks are not fully disclosed, you should consider whether the provider offering the CFDs is legitimate.
Here’s a list of some of the countries that allow CFD (Contract for Difference) trading:
- United Kingdom
- The Netherlands
- South Africa
- New Zealand
- Hong Kong
- The Netherlands
One important point to note and not get confused with is that although as a US trader you cannot trade in Contracts for Difference, traders in other countries such as those above can still trade on the price change in US Dollar currency pairs, and US based commodities and other instruments. Though CFDs are not available and legislated against in the USA, traders and speculators in other countries where CFDs are legal (check out this article here about the legality of CFDs here in Australia) should not be perturbed by this point alone. As always you should do your due diligence to see if CFDs are right for you and your financial position.