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This question may seem inappropriate for this StackExchange but it's the pricing and actual return dynamics that define the instrument so you guys seem the most knowledgeable on this topic.

I was reviewing the different groups of the Classification of Financial Instruments codes (CFI, norm ISO 10962:2015) and struggled to identify how a currency pair position held with a retail foreign exchange broker should be classified.

It is definitely not a spot transaction since the notional amount of the lot is never actually settled.

Is it then an "Entitlement" >> "Mini-future certificates/constant leverage certificates [RF]" ? It is defined on Nasdaq website as

"A leverage certificate is a certificate issued by a bank or financial institution. The leverage certificate reflects the change in the value of the underlying assets with leverage. The underlying asset can be, for example, a share, a bond, a commodity, a currency or a combination of different underlying assets. Leverage certificates usually have a long maturity with constant leverage that is rebalanced on a daily basis. Leverage certificates give the possibility of returns in rising markets (referred to as Bull) and falling market (referred to as Bear)"

It looks pretty similar to what a leveraged position on a currency pair is but I have the feeling that constant leverage certificates are really specific instruments that do not cover the case I'm mentioning.

Or is it a CFD? But retail brokers generally make a distinction between CFDs and currency pairs in their product offering... It is classified in the CFI standard under "Forward", "Foreign exchange", Attribute 3 "Return or payout trigger": CFD

It could be a spread bet, defined on Investopedia as

Spread betting is a derivative strategy, in which participants do not own the underlying asset they bet on, such as a stock or commodity. Rather, spread bettors simply speculate on whether the asset's price will rise or fall, using the prices offered to them by a broker.

It is classified in the CFI standard under "Forward", "Foreign exchange", Attribute 3 "Return or payout trigger": Spread-bet

This classification may seem the most accurate but why does it fall under the "Forward" category?

Thanks a lot for your help :)

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  • $\begingroup$ Yes, I think it is not an appropriate question here because it is a legal or regulatory question rather than quant. Furthermore the field of Retail FX is fairly dodgy and poorly regulated and not of much interest to serious Quants IMHO. $\endgroup$ – noob2 Jan 4 '20 at 16:26
  • $\begingroup$ Agreed. I've never worked with such brokers but I was considering it to hedge my ptf against currency risk for cheap (spread only) and without using much capital (margin requirements are low). As a retail investor I don't have many choices and fx futures lots are too large to not under or over hedge (I'm not a millionaire). $\endgroup$ – rmrndr Jan 4 '20 at 16:44
  • $\begingroup$ These look very much like DLCs - daily leverage certificates, see further details here: moneysense.gov.sg/articles/2018/10/daily-leverage-certificates $\endgroup$ – Magic is in the chain Jan 4 '20 at 19:15
  • $\begingroup$ I've checked your source, as well as others and it looks like DLC are Singapore specific instruments, reserved to qualified investors. Additionaly the sources are always mentioning a "fixed leverage of 3 to 7 times the daily performance of the underlying index", while fx brokers offer a wider range of leverage options. I'm not convinced it's the answer to my question, but thank you for your answer, I've learned something today :) $\endgroup$ – rmrndr Jan 4 '20 at 20:15
  • $\begingroup$ no worries, DLCs are big in Western Europe as well btw $\endgroup$ – Magic is in the chain Jan 4 '20 at 20:36

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