Why CFDs Are Illegal in the US But Legal in the UK — And What It Means for Traders
Contracts for Difference (CFDs) are banned for retail traders in the United States but fully regulated in the United Kingdom. Here’s why the laws differ and what the implications are for global investors.
Contracts for Difference (CFDs) allow traders to speculate on the price movements of assets such as stocks, commodities, and indices without owning the underlying asset. They are popular in Europe and Asia but banned for retail trading in the United States. The reason lies in how financial regulators define risk, leverage, and investor protection.
What Is a CFD?
A CFD is a derivative contract between a trader and a broker. The parties agree to exchange the difference in an asset’s value between the opening and closing of the contract. If the asset’s price rises, the trader profits; if it falls, they lose.
Unlike traditional investments, CFDs allow both long and short positions and can be highly leveraged — meaning small price movements can generate large gains or losses.
Why CFDs Are Illegal in the United States
In the US, CFDs fall under the jurisdiction of two key regulators: the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Both agencies classify CFDs as over-the-counter (OTC) derivatives, which cannot be legally offered to retail investors.
1. Investor Protection and Leverage Concerns
US regulators consider CFDs too risky for the average retail investor. The products often use leverage of up to 30:1 or more, amplifying both potential gains and losses. Under US law, leveraged derivatives must be traded on regulated exchanges, not directly with brokers.
2. Conflict of Interest
In most CFD structures, the broker acts as the counterparty to the trade — essentially betting against the client. The CFTC considers this a structural conflict of interest.
3. Lack of Transparency
Because CFDs are off-exchange contracts, they do not go through central clearing. This makes them harder to monitor and increases systemic risk.
As a result, no broker registered with the SEC or CFTC can legally offer CFDs to US residents. Some brokers outside the US attempt to attract American clients, but doing so violates federal law and can result in enforcement actions.
Why CFDs Are Legal in the United Kingdom
In contrast, the UK — through the Financial Conduct Authority (FCA) — allows CFD trading under strict regulations.
1. Regulatory Oversight
The FCA requires all CFD providers to be authorised and adhere to strict capital, conduct, and reporting requirements. Client funds must be held in segregated accounts.
2. Leverage Limits and Risk Warnings
Since 2019, UK and EU rules have capped CFD leverage for retail traders:
- 30:1 for major currency pairs.
- 20:1 for non-major currency pairs and gold.
- 10:1 for commodities.
- 5:1 for individual equities.
All CFD platforms must display prominent risk warnings — for example, “79% of retail investor accounts lose money when trading CFDs.”
3. Negative Balance Protection
FCA rules ensure traders cannot lose more than their account balance. This protection prevents debt accumulation from rapid market moves.
The Key Difference: Regulatory Philosophy
The US approach prioritises prohibition for retail investors, assuming the risk cannot be adequately mitigated. The UK model emphasises disclosure, education, and supervision rather than outright bans.
In short:
- US: Protect investors by restricting access.
- UK: Protect investors by regulating access.
Consequences for Global Traders
- US Residents: Cannot legally open CFD accounts. Those seeking similar exposure must use regulated instruments such as futures, options, or exchange-traded funds (ETFs).
- UK and EU Residents: Can trade CFDs with FCA- or ESMA-regulated brokers but must accept leverage limits and risk disclosures.
- International Brokers: Many maintain separate legal entities — for example, one regulated by the FCA (UK clients) and another under ASIC (Australia) for global traders.
Traders who use VPNs or offshore brokers to bypass restrictions risk losing legal protections if disputes arise.
Economic and Practical Implications
The US ban has shifted CFD demand toward Europe and Asia, making London and Sydney the largest global hubs for CFD trading. UK brokers such as IG, CMC Markets, and Plus500 dominate the international market.
CFDs account for nearly 40 percent of all UK retail trading volume, according to the FCA’s 2025 report. However, the average loss rate among retail accounts remains high, prompting continued regulatory scrutiny.
The Bottom Line
CFDs offer flexibility and accessibility, but they come with significant risk. The US bans them to protect retail investors from high leverage and broker conflicts, while the UK allows them under controlled conditions.
For traders, the choice depends on jurisdiction — and on balancing the freedom to trade with the discipline to manage risk responsibly.
References:
- FCA – CFD and Spread Betting Rules 2025
- CFTC – Off-Exchange Derivatives Restrictions
- SEC – Derivatives and Leverage Guidance 2024
- ESMA – Investor Protection and Leverage Limits Report 2025
- IG Group – Retail Trading Trends 2025
