These case studies have been modified so as not to identify any actual cases at FIDReC. They are provided for purposes of learning and are not necessarily indicative of outcomes at FIDReC.
Paul was an active trader. He used Company X’s online trading platform to trade in Contracts-For-Difference. Company X assigned a trading representative, John, to Paul. John provided the latest market updates to Paul and helped carry out Paul’s instructions on his trading account.
One day, John told Paul that his trading account was on margin call. Paul needed to top up his trading account within 24 hours to meet the margin requirement. Paul transferred some money into his trading account but there was a steep fall in the market. This caused the value of Paul’s positions to plunge, and his trading account remained in deficit. Company X then liquidated all Paul’s positions and Paul suffered losses.
Paul was unhappy that Company X liquidated all his positions as he had informed John that he would top up his trading account. Paul asked Company X for compensation but was unsuccessful. Company X then referred Paul to FIDReC.
At mediation, Company X’s representative explained that the top up did not arrive in time. Even if it did, it was still not enough to cover the margin required due to the market fall. Additionally, Company X explained that John had no responsibility to inform Paul to top up his account further. The terms and conditions Paul signed stated that Company X was not obliged to communicate any margin call to Paul. In such a situation, Company X had the right to close some of, or all, Paul’s positions.
Paul acknowledged that Company X had followed its process to manage the margin call. At the mediator’s prompting, Company X also acknowledged that Paul had been a long-time client. Paul had even continued to trade using its platform despite the incident. Out of goodwill, Company X offered to give Paul a preferential financing rate for his trading activities until Paul recovered his losses. Paul accepted the offer and signed a written settlement agreement with Company X.
Key Learning Points
- If you want to do margin or leveraged trading, make sure you understand the risks involved. The losses from leveraged trading are magnified when the market is going against you.
- Before you trade online, make sure you read and understand the terms of the trading platform. Most financial institutions that offer online trading platforms provide execution-only services to clients. This means that they have no obligation to monitor the client’s trading activities or intervene to give instructions to the client.
- In most cases, it is the clients’ responsibility to ensure that the trading account meets any margin requirements. The financial institutions usually have the right to close off clients’ positions in margin-call situations. This protects the clients’ trading accounts from further losses. The financial institution cannot assume that the client can top up the account further or that the market will recover.
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