IG and CMC face 'collateral damage' from stricter CFD rules, warn analysts
By Oliver Haill
Date: Tuesday 06 Dec 2016
(ShareCast News) - Although IG Group and CMC Markets are not the intended targets of a clampdown by the Financial Conduct Authority's stricter rules for firms selling contract for difference products, analysts warned they would be receive collateral damage to revenues.
The City of London watchdog issued a note on Tuesday morning that proposed stricter rules for firms selling CFDs to retail customers, to "improve standards across the sector and ensure consumers are appropriately protected".
Proposals, which will undergo consultation with the industry until March, include mandatory disclosure of profit-loss ratios to better illustrate the risks, setting a maximum leverage limits of of 25:1 for inexperienced retail clients, capping leverage at a maximum level of 50:1 for all retail clients, and preventing providers from using any form of trading or account opening bonuses or benefits to promote CFD products.
Paul McGinnis at broker Shore Capital pointed out that IG and CMC "typically operate at the higher end of the market in terms of average revenue per client - implying clients with greater understanding of the products - and would therefore be less impacted in relative terms. However, the rapid growth seen in leveraged trading in recent years has clearly got onto the radar of regulators which may moderate the growth in new clients going forward."
RBC Capital Markets said the news "is negative - period" and that even though CMC and IG have the highest standards and are unlikely to be the intended targets, they "will be negatively impacted nonetheless", noting that IG takes 50% of revenue from the UK, with CMC just under 40%.
"While the quantum of the impact is very difficult to determine, we believe the companies will experience share price reactions as a result of souring sentiment, derating and a likely negative impact to forecasted growth," RBC said, adding that it is likely that other countries within the EU will follow suit.
Analyst Jonathan Goslin at Numis pointed out that in recent months, Cyprus has restricted leverage and bonuses, France has moved to ban all digital advertising of CFDs, Belgium has banned CFD trading, the Netherlands is exploring whether it will follow France and ban the advertising of CFDs whilst Germany said it could 'intervene' shortly.
Goslin puts his rating on IG under review and downgraded CMC to a 'sell' rating from 'hold', noting that binary bets were one of CMC's key growth areas.
He said he believed the majority of the regulation being discussed or implemented has been targeted at the lower quality end of the market "i.e. Plus500 and below", which was "long overdue" but was "likely to have a material impact, at least in the near to medium-term, on CMC's growth and profitability across the UK and Europe".
On IG, he said it could be positive in the longer run: "Most of IG's customers are experienced and most do not utilise the maximum leverage currently available to them. It should however increase a customer's trading life span which will support longer term revenue growth."
RBC's rating for IG was left unchanged at 'sector perform' and its price target at 865p offering upside to Monday's 791p close, while CMC retained its 'outperform' rating with a 315p price target versus a 184p closing price on Monday.
IG slumped by a third to 526.5p by midday on Tuesday, while CMC was down 32% to 124.8p and Plus500 was down 25% to 388.6p.
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