By Liam Thomas
In the UK, CFDs may be held for a maximum of 90 days before you must sell them. However, there are some exceptions to this rule that traders should be aware of. In this article, we’ll take a closer look at the 90-day holding limit for CFD traders in the UK and some exceptions that may apply. We’ll also discuss how to comply with these regulations if you hold a CFD for more than 90 days here.
What is a CFD, and what are the benefits of holding one in the UK?
A CFD, or contract for difference, is a type of financial derivative that allows traders to speculate on the price movements of underlying assets. CFDs are traded on margin, meaning traders only need to put down a small deposit (known as a margin) to open a position. It makes CFDs an attractive proposition for many traders as they offer leverage, which can help to magnify profits. CFDs are also popular among UK traders as they are not subject to stamp duty, unlike other financial instruments such as shares.
What is the 90-day holding limit, and why does it exist?
In the UK, you must sell CFDs within 90 days of being bought. This rule protects retail investors from the dangers of holding a CFD for too long. When holding a CFD for a prolonged period, you are exposed to the risk of the underlying asset going into reverse and making losses. It is known as overnight risk.
To help mitigate this risk, the UK’s Financial Conduct Authority (FCA) has introduced the 90-day rule. This rule states that any CFD must be sold within 90 days of being bought. There are some exceptions to this rule which we’ll discuss later. You will breach FCA regulations if you do not sell your CFD within 90 days. It could lead to several penalties, including a fine or even a ban from trading.
How can I stay compliant with the 90-day rule?
If you hold a CFD for longer than 90 days, you can do a few things to stay compliant with the rule.
- Make sure that you sell your CFD before the 90 days is up.
- Keep track of your CFD positions and ensure you do not have any open for more than 90 days.
- Consult your broker or financial advisor if you are unsure whether you comply with the rule.
By following these simple steps, you can ensure that you comply with the 90-day rule and avoid any penalties from the FCA.
Beyond tax advantages, are there other benefits to holding a CFD in the UK?
There are many other benefits to holding a CFD in the UK. These include:
- The ability to trade on margin can help you to magnify your profits.
- Unlike other financial instruments such as shares, no stamp duty is payable on CFDs.
- You have the flexibility to choose the settlement date of your contract.
- You can take long and short positions on CFDs, allowing you to profit from rising and falling markets.
Risks that traders should be aware of
These include:
Overnight risk: This is the risk that the underlying asset’s price will move against you while you are holding a CFD overnight.
Margin call risk: If your position’s value falls below your broker’s margin requirements, you may be subject to a margin call. It could lead to your position being closed out at a loss.
Liquidation risk: If the value of your position falls below the stop-out level set by your broker, your position may be automatically closed out by your broker. Again, this could lead to losses.
Conclusion
CFDs are a popular type of financial derivative that allows traders to speculate on the price movements of underlying assets. In the UK, CFDs must be sold within 90 days of being bought. This rule protects retail investors from the dangers of holding a CFD for too long and exposure to overnight risk. Check out Saxo’s website to learn about the dangers of holding a CFD for too long.
