Corporate actions on share CFDs

A share contract references a stated number of shares in a listed company. Companies restructure their own share capital regularly, and when they do, the shares the contract references change in number, in identity or in both. A contract that was not adjusted would suddenly reference something other than what it was written on, so brokers adjust open contracts to keep the economics unchanged across the event.

The principle governing every adjustment is the same and it is worth stating once: the adjustment aims to leave the contract holder economically neutral. A holder should be neither better nor worse off for the event itself, only for whatever the market subsequently does. Everything below is that principle applied to a particular kind of restructuring.

Because a CFD is a contract with the broker and not a holding in the company, the contract holder is not a shareholder. There is no vote, no entitlement to take up an offer, no place on a register and no opportunity to elect between alternatives that a company puts to its shareholders. The adjustment is applied, not chosen, and that is a structural consequence of the instrument rather than a policy of any firm.

Splits and consolidations 

A share split divides each existing share into several, and the price divides by the same factor. Nothing about the company changes, and the total value of a holding is unchanged: there are simply more units at a proportionally lower price. A consolidation, also called a reverse split, does the opposite, replacing several shares with one at a proportionally higher price.

The adjustment to an open contract mirrors the action exactly. The quantity of the position is multiplied by the split factor and the opening price is divided by it, so the notional value and the unrealised result are both unchanged the instant the adjustment is applied. Where the factor produces a fractional quantity, the fraction is conventionally settled in cash rather than left as a fractional contract.

One practical consequence of a split is easy to overlook. Attached stop and limit orders are adjusted by the same factor, and where a broker cannot adjust them cleanly they may be cancelled and require replacing. Firms publish their handling in advance of a known action, and the notice states what happens to resting orders as well as to positions.

Rights issues and bonus issues 

A rights issue offers existing shareholders the opportunity to buy new shares at a stated price, usually below the market. Because the new shares are issued below market, the market price of the existing shares falls to reflect the dilution, and a shareholder who takes up the rights is compensated by acquiring shares cheaply. A contract holder has no ability to take up anything, so the broker applies a cash adjustment representing the value of the rights instead.

A bonus issue, sometimes called a scrip issue or a capitalisation issue, delivers additional shares to holders at no cost, which is arithmetically indistinguishable from a split and is adjusted the same way. The distinction between the two matters to the company's accountants and not to the contract.

Mergers, takeovers and delistings 

These are the actions in which a contract can cease to have an underlying, and they are handled more bluntly than the others for that reason. Where a company is acquired for cash, the shares are cancelled and there is nothing left to reference, so open contracts are closed at the offer price on the effective date. Where a company is acquired for shares in the acquirer, the contract may be converted into a contract on the acquirer at the exchange ratio, or closed, depending on whether the firm carries the acquirer.

A delisting removes the venue whose price the contract reads. Without a listed price no contract can be quoted, so open positions are closed at the last available price or at a price determined by the firm's own policy where the last price was itself disorderly. This is one of the few situations in which a position is closed on a schedule set by an event rather than by the market or the holder.

A spin off is the mirror image, where a company distributes shares in a subsidiary to its shareholders. The parent's price falls by the value distributed, and the contract holder receives a cash adjustment for that value, since the shares in the new entity cannot be delivered into a contract that does not reference them.

Suspensions and trading halts 

An exchange can halt trading in a share, either briefly under a volatility rule or indefinitely pending an announcement. While the share is halted no price exists, so the contract cannot be quoted: positions stay open, no order can be filled, and no stop can trigger however far related instruments move. Margin continues to be held and financing continues to accrue throughout.

Because a halt pending an announcement usually resolves into a substantial price change, the reopening after one is among the most discontinuous events a single share produces. Firms frequently raise the margin requirement on a suspended instrument while it is halted, which reduces free margin on any account holding it at a moment when nothing can be traded to restore the balance.