MF Global warning sparks fears of sell-off

MF Global warning sparks fears of sell-off - LINK

One of London's leading brokers has demanded that clients put up significantly more cash to cover derivative positions - a move which traders fear could result in millions of shares being dumped on the market today.

MF Global informed clients yesterday that the "margin" on contract for differences (CFDs) was increasing on certain stocks from 25pc to 90pc. The clients have been given until this morning to put up the extra cash or close positions.

Traders fear that the move could increase market volatility as clients - unable to find the cash or transfer their investments to other brokers - are forced to close their positions.

"You are going to see a lot of forced selling," said one leading London stockbroker.

FTSE 250 stocks and stocks popular with small investors are expected to be hardest hit, with observers warning that other CFD providers - including IG Index and City Index - are also looking at increasing margins.

CFDs allow investors to gain exposure to £1,000 worth of shares, by putting up as little as £100 of cash. Once the domain of financiers and corporate raiders, the controversial derivatives have in recent years been used increasingly by both private and professional investors. But an executive at a leading CFD broker warned yesterday that "the days of cheap finance for CFD investors are over".

"Can you imagine walking into a bank today and asking to borrow money to buy shares at just 1.5 points above base rates?" he asked.

The FTSE 100 closed down 60.2 at 5545.6 yesterday after another volatile day's trading which saw 4.1bn shares change hands, compared with the daily average of around 3bn.

Shares in Halifax owner HBOS were among the biggest fallers as it was rocked by false rumours that it had approached the Bank of England for emergency support. The stock slumped 17pc at one point, prompting both HBOS and the Bank to vehemently deny the rumours. HBOS shares recovered to close 7pc lower at 446.25p, down 33.75p.

The Financial Services Authority announced it had launched an investigation into market abuse. The regulator said: "We will not tolerate market participants taking advantage of the current market conditions to commit abuse by spreading false rumours and dealing on the back of them."

MF Global told clients yesterday that the margin on FTSE small cap and US stocks would increase to 90pc. FTSE 250 and European stocks will require a 75pc margin.

A senior MF Global salesman told one client the company was finding it increasingly difficult to finance highly-leveraged positions. "We're freezing people out of anything but the FTSE 100," he said. MF Global, which is listed in New York, denied rumours about its liquidity. Shares in the broker recovered a little after Monday's plunge which saw almost two thirds wiped off the company's value.

Last month, London-based CFD provider Global Trader Europe fell into administration after one of its clients failed to meet a margin call.

Indeed. I received a notification from my CFD provider regarding margin changes. But the interesting part was that changes were not done on entire sectors or indices but rather on specific equities. Will be interesting to keep an eye on the ones listed...

WTF ???? Talk about creating a cascading downward death spiral !!!! Wait until some banks starts doing the same, and telling clients worldwide they need to do that for all assets denominated in the $US Peso ! The ******** will really hit the fan then. I expect to some major damage from here on out, and then some coordinated lowering of interest rates very soon. The folks holding out on the Euro are gonna start being disappointed. While they need to keep them high they will be forced to drop 'em or risk, wiping out many a investors equity portfolio.