An efficient internal risk management policy is one of the most important issues that CFD providers, including product providers that offer Australian CFDs, have to attend on daily basis. Known as hedging, this is a technique designed to reduce or eliminate financial risk. This amounts to taking two opposite positions in Australian CFDs that will offset each other if prices change.
One of the ways that they hedge their risks associated with short positions in Australian share CFDs is to borrow Australian shares from non-residents for Australian tax purposes.
When you buy or sell Australian CFDs you are actually entering into a contract in which the CFD provider is the counterparty, who is also exposed to a risk. Only, in this case the CFD provider has to take into account its entire exposure based on all positions that clients have opened in Australian CFDs. In many cases the short positions may be offset by long positions but there may be instances where short positions in Australian CFDs far outnumber long positions. To cover its risk, a provider of Australian CFDs prefers to borrow the underlying Australian shares from non-residents for tax purposes.
However, if it has to borrow shares to cover your short position in Australian CFDs from Australian residents, it has to take into account the adjustments that it might have to make in the accounts holding Australian CFDs.
To this purpose, a CFD provider will make adjustments on AustralianCFDs held in your account to the tune of cash dividends as well as any attached franking credits. However, this may not be necessary in all cases and may be done with or without any prior notice in this regard.
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