CFD Mechanics

1. Leverage

The use of CFDs involves a high degree of leverage. These contracts enable a

user to outlay a relatively small amount (in the form of initial margin) to secure an exposure to the underlying share. This leverage can work against you as well as for you. The use of leverage can lead to large losses as well as large gains. For example, if you have a positive view about the prospects of a company, you could either buy 10,000 shares of the company at $1.00 and pay your broker $10,000 (plus costs) or you could buy the company CFD and use an Initial Margin of $1,000 (plus costs). For the experienced investor, this leverage provides an attractive means of gaining exposure to the performance of the underlying shares without the need to invest in the physical share.

2. Margins

The entry into CFDs involves the payment of margins. There are two components of the margin, which you may be required to pay in connection with CFDs. These are initial margin and variation margin.

The Initial Margin is an amount of money that will be debited from your account at the time the CFD is entered into. The initial margin represents the security deposit value that you are required to hold when you first open a CFD position. The initial margin is typically 10% of the contract value or will represent the assessed risk value that the principal determines should apply, in its sole discretion.

The Variation Margin is the unrealised profit or loss on your open position. This amount is equal to the dollar value movement in your open position when compared against the current market price.

The Gross Liquidation Value (GLV) is the amount of money you would have in your account were you to close out all positions (ie realising variation margin) at the current market price (less any transaction charges or adjustments).

The Free Equity balance is defined as Gross Liquidation Value (GLV) less Initial Margin. Free equity can be utilised to enter into further CFD positions or can be withdrawn from your account (subject to account minimum balance being maintained). Margin calls must normally be met within 24 hours of making a margin call. In some situations you may require payment within a shorter time period (for example where there is unusual volatility).

Example:

Account Balance	Initial Margin	Variation Margin	GLV	Free Equity
$20 000	-$2 000	+$1 000	$21 000	$19 000

3. Margin Calls

You are provided with notice of the variation margin by making a “margin call” (via e-mail, fax,sms message, telephone or via post). When we make a margin call you must deposit the amount of funds that we request into your account. If you fail to make margin payments we may reduce or close all your open positions without further notice. Please note the sell down procedure below:

The principal have defined automatic margin call actions at various trigger levels that will:

• Notify clients directly through a pop-up (like the trade confirmations) in the client station. It will be shown immediately when the client is on-line or as the first thing when the client logs on. This communicates to the client that more money needs to be deposited or positions need to be reduced to ensure their positions are adequately covered.
• Alert the individual client by e-mail when a client's margin has been exceeded. This communicates to the client that more money needs to be deposited or positions need to be reduced to ensure their positions are adequately covered.
• Automatically close all of a client's margin positions

Trigger levels are defined based on the percentage of margin required and the client’s net free equity. Trigger levels are normally defined to trigger more severe actions, as the margin situation becomes more severe.

The trigger levels are:

• First margin call for client:101%
• Second margin call for client:110%
• Third margin call for client:130%

The client’s position is automatically closed out if no action by the client is taken at 150% without reference to the client.

4. Daily payment of differences

Following the close of business on each Business Day during the term of a CFD, the principal will determine the contract value of the CFD that will apply as at close of business, ordinarily based on the closing price quoted by the relevant exchange. Where the principal considers that the closing price can not be determined on that basis; it will determine the value in its discretion.

Where the share is suspended or halted by the relevant exchange, the CFD position will be valued and a closing price will be determined.

a) Sold Open Positions

If the contract value at the close of business is, in monetary terms, greater than your sold contract value determined for the previous day, and you hold a “short” position in the CFD, you will pay the difference. Conversely, if the new contract value in monetary terms is less than your sold contract value, you will receive the difference. This is also known as variation margin.

b) Bought Open Positions

If the contract value at the close of business is, in monetary terms, greater than  your bought contract value determined for the previous day, and you hold a “long” position in the CFD, you will receive the difference. Conversely, if the new contract value in monetary terms is less than your sold contract value, you will pay the difference. This is also known as variation margin.

5. Closing a CFD

CFD’s do not have an expiry date. They remain open until they are closed in accordance with the terms of the client agreement. To close a CFD position, you place the order, either electronically or by telephone, to determine the current market price for the underlying security/instrument, with the view to close the position (or part of it). The total closing value is then determined by multiplying the number of CFDs by the price of the underlying instrument or security.

On the day that the CFD is closed, the principal will calculate the remaining payment rights and obligations to reflect movements in the contract value since the previous business close (including interest and other credits/debits). The determination of the closing value may be affected by certain events described below.

• If the CFD is over shares in a company which becomes externally administered, the CFD is taken to be closed at that time. If this happens, the principal will determine the closing price.

• If the CFD is over shares which cease to be quoted on the exchange on which they were quoted when the CFD was entered into, or are suspended from quotation for 5 consecutive business days, the principal may elect to close the CFD and/or call additional margin as determined by

the principal.

Please note:

Partial fills (ie order not fully filled) may occur on limit orders and the remainder stays in the duration of time. Also market orders can be filled at numerous levels, the volume average weighted price will be used as the average price.