MF Global cash call to cover CFDs sparks fear of sell-off

Stock markets faced new selling pressure today as leading broker MF Global demanded more cash from clients to cover derivative positions.

In some cases the margins will rise from 25% to 90%, requiring a big injection of funds that could lead to a massive sell-off of shares as investors scramble to raise the money to cover their positions.

MF Global has given customers until this morning to find the cash or close their positions. That has led to fears there will be forced selling, with millions of shares being dumped on a volatile market.

The cash call is to cover positions on contracts for difference (CFDs), the popular derivative products provided by companies such as IG Index that allow investors to put up a small amount of money to obtain exposure to large shareholdings. In some cases clients have had exposure to shares worth 10 times their investment.

But brokers warn that the days of cheap finance for CFD investors are over as providers are squeezed in the global credit crunch. MF Global says it is increasingly difficult to finance highly leveraged positions, particularly on small-cap stocks. In a move that will see smaller investors pushed further towards FTSE 100 companies, MF Global is increasing the margin on FTSE small-cap and US stocks to 90%. The broader FTSE 250 and European shares will move to 75%.

The business has also inflicted pain on some CFD providers.

Last month, Global Trader Europe, a City-based CFD provider, went to the wall. According to the administrator, 200 clients are set to lose more than £20 million, although there is believed to be some chance of a rescue deal, with three parties said to be interested in buying parts of the firm.