Regulatory Bylaw No. (36) Regulatory Framework for Licensing CFD Trading Activities and Leveraged Trading

Securities Commission

Based on the provisions of Legislative Decree No. (74) of 2004, Section (12), and the authority vested in us thereby, we have issued the following Regulatory Bylaw:

Regulatory Bylaw No. (36) Regulatory Framework for Licensing CFD Trading Activities and Leveraged Trading

Article (1) Definitions:

First - Contracts for Differences (CFDs): These are financial derivatives that allow an investor to speculate on the price movements of assets (such as stocks, commodities, and indices) without actually owning the underlying asset. Instead, they involve entering into an agreement with a broker to pay the price difference between the entry and exit points of a trade.

Second - License: This is the discretionary authority granted to the Chairman of the Securities Commission to approve the regulation of CFDs in accordance with this Bylaw.

Third - Financial Leverage: This is a tool for lending the client trader an amount equivalent to multiples of the amount they have allocated for trading.

Fourth - Margin Trading: An investment mechanism requested by the investor/trader from a trading broker that allows them to trade with a value greater than their funds, with the aim of increasing their profits. The trader usually pays a percentage of the trade value as margin collateral. There is a margin mechanism that the trader must review before using this tool, related to initial margin, maintenance margin, and financial leverage.

Fifth - Financial Solvency: Generally, it is a company's ability to meet its long-term obligations, and in the context of this Bylaw, it is the company's ability to meet its contractual obligations with its clients arising from the nature of its business.

Sixth - Financial Guarantees: The additional financial capacity of the company, commensurate with the volume of its business, to guarantee the rights of its clients, which is required by the international licensing authority.

Seventh - Initial Margin: This is the minimum amount of funds or cash that an investor/trader must deposit with a brokerage firm to open a new trading position or financial position. It is also known as deposit margin or initial collateral against default risk.

Eighth - Maintenance Margin: This is the minimum equity (or percentage of margin level) that an investor/trader must maintain in their account compared to the margin used in order to keep current leveraged positions open. The broker determines this percentage. If the account balance falls below this limit, a margin call is triggered – requiring the trader to deposit funds or close positions (fully or partially to cover the difference).

Article (2) Importance of CFDs:

First: CFDs are considered advanced financial instruments that require expertise and capability when engaging in this type of investment to reduce potential risks, especially when using Financial Leverage.

Second: The process of monitoring CFD prices provides the underlying original price, and trading these contracts offers advantages such as margin trading and instant execution, unlike traditional stock trading on exchanges. It should be noted that these contracts must be settled when the position is closed, and trading costs should be based on the price difference or commission or both.

Third: Clients' need for funds to support margin requirements to enter and maintain a position.

Fourth: CFDs can be traded whenever the underlying markets are open, unlike stock trading which is restricted to the operating hours of the associated exchange, which increases the level of risk. For example, stock CFDs are available for trading when the associated stock market is open. However, CFDs on stock indices, such as the US 30 index or the Hong Kong 50 index, trade around the clock alongside the underlying futures contracts – so it is possible to hedge or trade around events that occur outside official stock trading hours.

Article (3) Regulatory Conditions:

First: The granting of this license is limited to reputable international brokerage firms (with a clean history and solid professional performance free of violations) that meet high financial, regulatory, and technical standards, in order to protect shareholders and market stability. An economic feasibility study for this activity in Iraq must be attached with the requirements.

Second: The company nominated for licensing by the Iraqi Securities Commission must hold (5) five valid Tier-1 onshore international financial regulatory licenses (offshore licenses, as referred to in Appendix A of this Bylaw, are not accepted), reflecting the robustness of its regulatory standing and international presence.

Third: A historical record of no less than (10) ten years of work in the field of financial derivatives through Tier-1 financial regulatory bodies, as referred to in Appendix A. Explicit operational experience in brokerage and electronic trading in global markets (securities and/or commodities) is required.

Fourth: Submission of proof of applying best practices in governance, risk management, compliance, anti-money laundering, and combating terrorist financing. (Submission of copies of guides regulating the mentioned topics).

Fifth: Candidate companies for licensing must possess advanced and secure electronic trading systems with the application of cybersecurity standards and business continuity.

Sixth: A training and qualification plan for Iraqi cadres must be submitted, with a minimum number of Iraqi technical cadres (specialized in financial markets) within the company.

Seventh: The foreign company applying for the license must establish a branch or a licensed company in Iraq subject to the supervision of the Iraqi Securities Commission, provided that financial guarantees of no less than (5,000,000,000) five billion Iraqi Dinars or its equivalent in US Dollars are provided by the parent company from a bank approved by the Commission, and these requirements are aligned with the requirements of the international authority that licensed the parent company.

Eighth:
a - The minimum capital for the company applying for the license is (10,000,000,000) ten billion Iraqi Dinars if it is established in Iraq. b - The company must possess at least (5) five Tier-1 onshore international financial regulatory licenses. c - It must have financial solvency. d - Financial guarantees. e - Initial margin and maintenance margin for clients.

Ninth: The Commission shall adopt a system of periodic regulatory oversight to ensure the compliance of licensed companies with instructions. The Commission has the right to cancel or suspend the license, impose fines, or stop individuals in case of non-compliance with regulatory requirements.

Tenth: Companies wishing to obtain a license shall pay an amount of (10,000,000) ten million Iraqi Dinars as license fees.

Eleventh: The Commission has the right to review the work of established companies and issue subsequent bylaws concerning operational matters to raise the level of performance efficiency.

Article (4) Trading Mechanism:

When buying CFDs, you are not buying actual shares, but rather speculating on the change in the share price. You enter into a contract with a broker regarding the development/change of the share price based on how the share price moves at the end of the session, up or down. The price of CFDs depends on the value of the underlying asset.

Suppose you opened a long position (opening a long position means buying). Then, the broker, in turn, buys the actual shares for the CFDs, expecting the share price to rise, and then the price actually rises, which means that the value of your contract increases accordingly – and you make a profit.

However, if the share price falls at the end of the session and you close the contract (and the settlement is made by the broker), you incur a loss, and if you have used leverage, the loss will be greater.

It is very important to know the costs of CFD transactions. There is a commission associated with entering and exiting a CFD position, which must be taken into account. In addition, there is a cost associated with holding an open position overnight, known as the borrowing cost.

Article (5) Use of Financial Leverage:

First: The use of financial leverage is proportional to the amount of that leverage. For example, if the leverage is 1:10, it means providing facilities equivalent to ten times the amount ready for investment/trading by the client. So, if the amount allocated for investment is one million dinars, under this leverage, 10 million dinars are provided for trading with the aim of multiplying profits. Leverage can reach more than 100 times in forex trading.

We emphasize once again that using leverage is very tempting, but the risk is very high in case of loss, as it may wipe out the entire investment amount. Its use must be done wisely, carefully, and under the supervision of an experienced expert.

Some international regulations (such as in European markets, for example) ensure clients a degree of protection when trading CFDs. When entering a CFD trading order, clients must be able to meet the initial margin requirement (refer to the definition in Seventh of Article One), which is higher than the maintenance margin (the amount of available capital required to keep a leveraged trade open – refer to the definition in Eighth of Article One). This prevents the liquidation of a client's positions as soon as the position enters negative profit/loss if the client attempts to use all available funds to meet the margin requirement.

Second: Opening buy and sell positions occurs when the trader enters into CFDs, for example, on stocks. Profit can only be made when markets or stock prices rise. However, when trading CFDs, you can speculate on price movements in any direction. This is known as "buying" (if you believe prices will rise) or "selling" (if you believe markets will fall).

So, if a trader believes that the price of a particular company's stock will fall, they can short sell it by selling a CFD on the stock.

This can be done because CFDs are derivatives, and you do not need to own any shares in the company to sell CFDs based on the shares.

Third: Profits in CFDs are realized as a result of the difference between entry and exit prices. If the contract is a buy contract and the exit price is higher than the entry price, the difference is profit. If the contract is a sell (short) contract and the exit price is higher than the entry price, the difference is profit. In the first operation, there is a buy then a sell (buy contract), and in the second operation, there is a sell (short) and then a buy.

It is very important to know that when short selling a CFD, you will be subject to the stock market rules in that particular (external/foreign) market. For example, when short selling CFDs, you may face a forced closure of a position if the underlying borrowed shares are recalled. This may happen if it becomes difficult to borrow the underlying shares due to institutional events such as acquisitions, dividends, rights offerings (and other merger and acquisition activities), or increased selling of the stock by hedge funds.

Fourth: There are two types of short sell orders: the first are good-till-cancelled orders, and the second are good-till-date orders. These orders may be canceled if borrowing availability ceases. Therefore, it is necessary to monitor short sell orders entered outside market hours or those that operate over several days.

A trader may face restrictions on the number of CFDs that can be short-traded in one day due to limited borrowing availability in the underlying market.

Fifth: The ability to speculate in financial markets does not require restricting the trader to exchange-traded products such as stocks and ETFs. In general, they can trade CFDs on a much wider range of assets.

Sixth: CFDs do not include a settlement period, unlike stocks, and this confirms that the trader's profit or loss is calculated as soon as the trading position is closed. This makes it much easier to enter and exit trades and quickly allocate your resources to your next position. On the other hand, with stock trading, it can take up to two days to settle trades and get the value of what was sold.

Faisal Al-Haimas
Chairman of the Securities Commission

Appendix (A)
List of Some International Regulatory Bodies

No.	Region	Country	Tier-1 Regulatory Body / Supervisory Authority	Common Abbreviation
1	North America	United States	Commodity Futures Trading Commission + National Futures Association	CFTC / NFA
2	Asia Pacific	Australia	Australian Securities and Investments Commission	ASIC
3	Asia Pacific	Singapore	Monetary Authority of Singapore	MAS
4	Asia Pacific	Hong Kong	Securities and Futures Commission	SFC
5	Europe	United Kingdom	Financial Conduct Authority	FCA
6	Europe	Germany	Federal Financial Supervisory Authority	BaFin
7	Europe	Austria	Financial Market Authority	FMA
8	Europe	Cyprus	Cyprus Securities and Exchange Commission	CySEC
9	Asia Pacific	Japan	Japan Financial Services Agency	JFSA / FSA Japan
10	Middle East	United Arab Emirates	Securities and Commodities Authority	CMA

For more information, you can refer to additional sources:
https://www.adss.com/ar/trading-glossary/contract-for-difference-definition https://www.home.saxo/ar-mena/learn/ways-to-trade/cfd https://capital.com/ar-ae/ways-to-trade/cfd-trading/what-is-cfd-trading https://www.etoro.com/ar/trading/cfd/what-is-cfd https://www.ig.com/ar-ae/learn-to-trade/ig-academy/how-cfd-trading-work

Appendix (B)
Illustrative Chart for Buying a CFD (Long Position) and Selling a CFD (Short Position) Source: Saxo Bank Inc.