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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 :)

rmrndr
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  • 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. – nbbo2 Jan 04 '20 at 16:26
  • 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). – rmrndr Jan 04 '20 at 16:44
  • These look very much like DLCs - daily leverage certificates, see further details here: https://www.moneysense.gov.sg/articles/2018/10/daily-leverage-certificates – Magic is in the chain Jan 04 '20 at 19:15
  • 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 :) – rmrndr Jan 04 '20 at 20:15
  • no worries, DLCs are big in Western Europe as well btw – Magic is in the chain Jan 04 '20 at 20:36
  • An example here: https://fundcentres.lgim.com/fund-centre/ETF/DAX-Daily-2x-Long. Please look up 'exchange traded product long/short' and then go to a market maker website – Magic is in the chain Jan 04 '20 at 20:40
  • That link refers to a leveraged ETF. I'm not sure it's the same instrument as a DLC. However, I didn't know what DLCs were 2 hours ago so I'm not an expert. But I'm sure that currency pair trades with fx brokers are certainly not trades on ETFs. – rmrndr Jan 04 '20 at 22:26

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