A dream that was realised

The Source, installed by artists Greyworld int...LSE foyer, Image via WikipediaBack in 2003 when I joined Man Financial [MF Global], the firm was one of the most active equity CFD [contract for difference] providers in the UK by volume. These derivative instruments are almost perfect economic substitutes for equities, albeit without voting rights.

As a firm, we typically hedged every CFD order received from customers by executing an order on the London Stock Exchange [LSE]. More significantly, we were almost indifferent between whether customers sent underlying equity orders to us or CFD orders. . This prompted me to question why CFD orders couldn't simply be traded on Exchange like an underlying equity. Indeed, why shouldn't the order book treat equities and CFDs fungibly, and leave the mechanics of how the trade is settled to downstream processes.

I pitched this notion to the LSE and to LCH.Clearnet, with the intention being that Man Financial would act as a matching counterparty to all CFD orders for the purposes of managing the cash funding requirements or stock borrowing arising from such trades. This proposal was favourably received by the other parties and efforts began to implement the necessary consultations and infrastructure changes.

Sadly, I left MF before the vision became a reality and Man Financial subsequently withdrew from the consortium for reasons that never became clear. Thereafter the initiative was held back by issues at LSE and LCH but I was delighted to read today that the initiative is now close to going live.

Aside from the benefits cited in the news report, one important feature I saw early on was that making equity CFDs exchange-traded removed the regulatory restrictions on the use of CFDs by mutual funds which existed in their OTC form. I felt that this would widen and deepen the use of CFDs to the benefit of all.

By coincidence, I met with Roger Liddell, CEO of LCH.Clearnet the other week whom I'd also known at Goldman Sachs and was pleased to hear my involvement hadn't been forgotten.
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