Market Fundamentals: Cashflows

Trading CFD in ASX is composed of different elements. Previously, price and margins were discussed, so the focus is now on cashflow. This article will take a look into different factors on how money is distributed., who gets paid and when.

Contract of Interest

The daily cost of funding an overnight position for an ASX CFD. It is paid by holders of long positions and received by holders of short positions. It is a fixed cash rate but also varies in accordance with relevant changes in the rate. For example if the CFD is denominated in Australian dollars, the rate is fixed to the Target Overnight Cash rate by the Reserve bank of Australia.

Open Interest Charge

The daily cost for holding an open position in ASX CFD. It is set by ASX, paid by holder of long and short positions the next trading day. The rate can be moved according to changes in the market but its only changed when needed. Its formula follows the same principles used in Contract of interest calculations. To determine the total interest rate add the OIC rate with the Contract of Interest rate.

Dividends

CFDs duplicate the dividends paid by the underlying commodity, but the time for payment is different. In shares the dividend is paid after the ex-date. In CFDs they paid and received on the ex-date. Long position receive dividends, while short positions pay dividends.

Index CFD

Every time a share goes ex-dividend, the index CFD recognises this and generates a dividend cashflow. This is pretty much the same with what would have been paid or received if someone had a share in the overall index.

Franking Credit Cashflow

This only applies to ASX equity CFDs, and represents franking credits. Holders of short positions pay FCC while holders of long positions receive them. They differ depending on NSOP (net short open positions) by DPM (designated price markers) when trading closes on the last cum date. The NSOP on the other hand, is derived by calculating net open positions expressed as percentage of the total short open position. For example, if the DPM is in long position you will receive the whole FCC. If the DPM is in the short position the FCC is discounted by the percentage of NSOP.

The ASX is a regulated market, so the trading process is actually much more technical than it sounds. Fortunately that's one thing that a trader shouldn't be worried about.