A contract for difference (CFD) is essentially a form of financial derivative contract between an investor and a CFD broker, under which the investor basically bets on whether the price of a particular commodity or asset will increase or decrease over the course of the contract. If the price is higher at the end of the contract than it was at the beginning, the CFD trader pays the difference to the investor. Conversely, if the price is lower, the investor has to pay the difference to the CFD broker. Thus, the investor does not actually trade or own the underlying commodity or asset but rather bets on the future price of such commodity or asset.
Given that a CFD is a complex instrument that involves a high risk of losing money, CFD trading is controversial and is for professional investors only. Indeed, the risks are deemed to be so great that CFD trading is currently banned in the United States. However, it is permitted in listed, over-the-counter (OTC) markets in many other trading countries, including the United Kingdom, Singapore, Hong Kong, Germany and Switzerland.
CFD trading, which is generally conducted online, is fast moving investment vehicle and requires close monitoring. Despite the risks, however, the regulatory framework governing CFDs remains weak in many jurisdictions, including Indonesia.
CFD Regulatory Framework in Indonesia
The regulation of CFDs in Indonesia comes within the remit of the Commodity Futures Trade Supervisory Board (Badan Pengawas Perdagangan Berjangka Komoditii / “Bappebti”). To date, no specific regulations have been issued that focus directly on online or cross-border CFD trading, although some offshore websites (without a legal presence in Indonesia) currently offer CFDs to local investors, including retail investors.
However, despite the absence of dedicated regulations focused on CFDs, CFD trading is broadly covered by Bappebti Regulation No. 109/Bappebti/PER/01/2014 on Derivative Contracts in Alternative Trading Systems (“Reg. 109”). As the name of this regulation would suggest, a CFD is therefore legally classified as a derivative contract traded in an alternative trading system (“ATS”). Reg. 109 further provides that CFDs may be based on movements in a:
- stock index;
- foreign exchange market; or
- commodities market
An ATS involves bilateral trading conducted outside a futures exchange. The sale and purchase of CFDs in an ATS is specifically governed by Bappebti Regulation No. 5 of 2017 on Alternative Trading Systems. Under this regulation, the trading of CFDs in an ATS may only be conducted by “ATS organizers” and “ATS participants” that are licensed by Bappebti (as further discussed below). It should be noted that an ATS participant (futures broker) with foreign participation is not permitted to conduct transactions in an ATS under Bappebti Regulation No. 76 of 2009.
Based on Reg. 109, a CFD must be reviewed by an Indonesian futures exchange -- there are currently two futures exchanges in Indonesia - PT Bursa Berjangka Jakarta (BBJ) which opened in 2000, and PT Bursa Komoditi Derivatif Indonesia (BKDI), which was established in 2009. It must then be submitted to the Head of Bappebti for approval.
ATS Organizers and Participants
An “ATS organizer” is defined as a futures trader who is a member of a futures clearing agency and engages in the sale and purchase of derivative contracts, other than futures and sharia derivative contracts, on its own behalf in the ATS.
An “ATS participant” is defined as a futures broker who is a member of a futures clearing agency and engages in the sale and purchase of derivative contracts, other than futures and sharia derivative contracts, on behalf of a client in the ATS.
Thus, to offer CFDs to investors in Indonesia, the offeror must be registered as a futures trader or broker in the ATS, depending on whether it trades on its own behalf or on behalf of a client.
Promotion and Advertising of CFDs
The promotion and advertising of CFDs on online platforms is governed by Bappebti Regulation No. 83/BAPPEBTI/Per/06/2010 on Procedures for the Conducting of Promotion and Advertising, Training and Meetings in Commodity Futures Trading.
The regulation defines promotion or advertising as any statement, explanation, or description related to futures trading that is conveyed to the public, whether in writing or orally, through the print or electronic media, or through an official or unofficial meeting.
Promotional or advertising content must be approved by Bappebti, while the conducting of promotional or advertising activities may only be undertaken by a licensed futures exchange or futures or derivatives broker that is registered with Bappebti. In other words, any party (whether Indonesian or non-Indonesian) that has not been licensed by Bappebti is prohibited from promoting or advertising commodity futures (including CFDs) in Indonesia.