The second issue: were the arrangements a "credit facility" and as such not a "financial product"?
59Both this issue and the next require the arrangements to be examined. There is no suggestion that they are to be examined otherwise than by reference to their legal form in the documents tendered before the primary judge. There was no suggestion of sham.
60The meanings of "credit facility" and "credit" are as follows.
61In 2006, at the time of the alleged offences, regulation 7.1.06(1) of the Corporations Regulations dealt with "credit facility" as follows:
"(1) For subparagraph 765A(1)(h)(i) of the Act, each of the following is a credit facility:
(a) the provision of credit:
(i) for any period; and
(ii) with or without prior agreement between the credit provider and the debtor; and
(iii) whether or not both credit and debit facilities are available; and
(iv) that is not a financial product mentioned in paragraph 763A(1)(a) of the Act; and
(v) that is not a financial product mentioned in paragraph 764A(1)(a), (b), (ba), (f), (g), (h) or (j) of the Act; and
(vi) that is not a financial product mentioned in paragraph 764A(1)(i) of the Act, other than a product the whole or predominant purpose of which is, or is intended to be, the provision of credit;
(b) a facility:
(i) known as a bill facility; and
(ii) under which a credit provider provides credit by accepting, drawing, discounting or indorsing a bill of exchange or promissory note;
(c) the provision of credit by a pawnbroker in the ordinary course of a pawnbroker's business (being a business which is being lawfully conducted by the pawnbroker);
(d) the provision of credit by the trustee of the estate of a deceased person by way of an advance to a beneficiary or prospective beneficiary of the estate;
(e) the provision of credit by an employer, or a related body corporate of an employer, to an employee or former employee (whether or not it is provided to the employee or former employee with another person);
(f) a mortgage:
(i) that secures obligations under a credit contract (other than a lien or charge arising by operation of any law or by custom); and
(ii) that is not a financial product mentioned in paragraph 763A(1)(a) of the Act; and
(iii) that is not a financial product mentioned in paragraph 764A (1)(a), (b), (ba), (f), (g), (h) or (j) of the Act; and
(iv) that is not a financial product mentioned in paragraph 764A(1)(i) of the Act, other than a product the whole or predominant purpose of which is, or is intended to be, the provision of credit;
(g) a guarantee related to a mortgage mentioned in paragraph (f);
(h) a guarantee of obligations under a credit contract."
62Regulation 7.1.06(3) defined "credit" for the regulation as meaning:
"(3) In this regulation:
credit means a contract, arrangement or understanding:
(a) under which:
(i) payment of a debt owed by one person (a debtor) to another person (a credit provider) is deferred; or
(ii) one person (a debtor) incurs a deferred debt to another person (a credit provider); and
(b) including any of the following:
(i) any form of financial accommodation;
(ii) a hire purchase agreement;
(iii) credit provided for the purchase of goods or services;
(iv) a contract, arrangement or understanding for the hire, lease or rental of goods or services, other than a contract, arrangement or understanding under which:
(A) full payment is made before or when the goods or services are provided; and
(B) for the hire, lease or rental of goods - an amount at least equal to the value of the goods is paid as a deposit in relation to the return of the goods;
(v) an article known as a credit card or charge card;
(vi) an article, other than a credit card or a charge card, intended to be used to obtain cash, goods or services;
(vii) an article, other than a credit card or a charge card, commonly issued to customers or prospective customers by persons who carry on business for the purpose of obtaining goods or services from those persons by way of a loan;
(viii) a liability in respect of redeemable preference shares;
(ix) a financial benefit arising from or as a result of a loan;
(x) assistance in obtaining a financial benefit arising from or as a result of a loan;
(xi) issuing, indorsing or otherwise dealing in a promissory note;
(xii) drawing, accepting, indorsing or otherwise dealing in a negotiable instrument (including a bill of exchange);
(xiii) granting or taking a lease over real or personal property;
(xiv) a letter of credit."
63The relevant arrangements were called "Contracts for Difference" or CFDs. The terms and legal content of such arrangements were to be found in two parts of a "Product Disclosure Statement" ("PDS") by CMC Markets Asia Pacific Pty Limited ("CMC" or "CMC Markets") issued 1 July 2005. The relevant terms appeared in part 1 of the PDS. Part 2 contained the schedules of rates for the different products.
64Part 1 of the PDS commenced with preparatory information and warnings about the speculative nature of dealing in CMC Products. It also made clear that one could not deal in CMC Products before an application so to do had been completed, submitted and approved.
65The relevant sections of part 1 of the PDS were: 1: Introduction; 2: Share, Index and Sector Contracts for Difference; 8: Risks of Dealing in CMC Products; 9: Other Matters You Should Note; 10: Taxation Considerations; 11: Margin Obligations; 16: CMC Agreement; 18: Glossary; and 19: Terms of Business.
66The Glossary in section 18 contains a large number of definitions. It would lead to prolixity to set out all relevant definitions. I will refer in the course of discussion to any critical aspect of these definitions. Definitions also appear in other parts of the contractual material.
67The introduction in section 1 contains explanations as to how dealing with CMC works. Various types of CFDs were offered by CMC - for shares, other securities, indices, sectors, gold, silver, commodities and treasuries, currencies and currency crosses: cl 1.1. One could deal with CMC, the latter acting as a principal, by telephoning the dealing desk or using CMC's internet platform, which had a back office and position keeping service: cll 1.2 and 1.3. The dealing platform allowed the latest real time price to be accepted by clicking "confirm" on the screen: cl 1.4. The prices on the dealing platform were CMC's prices, not the prices in the underlying market on which the CMC Products were based. Thus, the customer has a choice: the CMC Product, or the underlying asset: cl 1.5. CMC did not provide access to prices in the underlying market: cl 1.5.
68Clause 1.6 explained how CMC Markets determined the prices for its products. It is unnecessary to set this out at length. It is sufficient to say that CMC's prices were "based on the underlying mid-market price of the instruments in the underlying market and the application of a minimum spread which is applied at our discretion" (emphasis added). There was no predetermined percentage of variation from the price of the relevant underlying asset; and CMC might quote at its discretion different prices to different customers.
69A minimum account opening balance of $5,000 was required: cl 1.7.
70Initial and Variation Margins were required to be paid from time to time. They were explained in cl 1.9 (as well as defined in the Glossary). In cl 1.9 the following was said:
"The Initial Margin is the deposit that must be made when buying or selling CMC Products to protect CMC against default by you. These margins are generally 5-20% of the underlying value of the CMC Product. The Variation Margin is the difference between the value of a CMC Product when it was initially bought or sold and its value marked to market at any given time using CMC's Underlying Contract Price."
71Clause 1.10 described the account administration, and, amongst other things, described the utility of CMC's real time dealing platform.
72Clause 1.17 described how to open and close CFD positions as follows:
"A position is opened by buying or selling CFD's:
· BUYING a CFD - To make a profit, you want the price of the underlying security, index or asset to rise.
· SELLING a CFD - To make a profit, you want the price of the underlying security, index or asset to fall.
A position is closed by you entering into an equivalent and offsetting position in the relevant share CFD. Closing your position may result in a profit or loss being realised on your Account.
You may close part of an open position by executing an equivalent and offsetting position of a lesser amount than the open position."
73Clause 2.1 described share, index and sector CFDs, as follows:
"Contracts for Difference allow you to receive most of the benefits of owning a security without having to actually own the security. In other words you do not take delivery of the security so any difference in the price between when you buy the CFD and when you sell it is settled in cash. The difference is either profit or loss.
CFD's are also available on indices and baskets of securities. CFD's in relation to baskets of securities are known as Sector CFD's.
Buying and selling the performance of a securities [sic] or index using a CFD is similar to buying the actual underlying instrument using a loan.
You could borrow $10,000 from a bank to buy shares. You would receive the returns from the shares, but would pay interest on the loan to the bank. CFD's combine this process in a single transaction.
For example, if you want to buy AUD$10,000 worth of Australian shares you will have to deposit with CMC Initial Margin of AUD$1,000. You will then be allowed to purchase $10,000 worth of Australian share CFD's (based on a 10% initial margin percentage). The full $10,000 value of the share CFD's will be subject to the share price performance. If you want to keep the share CFD's overnight you must pay a financing charge on the total nominal value of the position at the Financing Rate. If a share CFD position is not carried overnight you will pay no financing charge.
As with the underlying securities, share CFD's allow you to benefit from normal market movements. Your open positions are valued every night at the close of business prices. Profits or losses are credited/debited to your Account each day. Adjustments relating to corporate actions, such as dividends, bonus issues and reconstructions in respect of the underlying security are also applied to your Account should they occur."
74Clause 2.1 then went on to describe adjustments for dividends (differently made on a long or short basis) to reflect what the holder of the underlying security would have received, after tax.
75Clause 2.2 explained the financing costs:
"Share, index and Sector CFD positions carried overnight will incur financing costs for the total notional value of the position at the relevant CMC Financing Rate. If you are long a CFD you may pay interest to CMC, whilst if you are short you may receive interest from CMC at the relevant CMC Financing Rate. The CMC Financing Rates are set out in the most recent Part 2 of the PDS that you will have received."
It will be important to understand that these so-called "financing costs" were not an interest charge for moneys lent or financial accommodation given. Rather, they constituted an element in the calculation of the sums by reference to which money is paid or received by a client.
76Clause 2.3 explained the charging of commission.
77Thus, CMC provided an opportunity for someone to deal in CMC's products identified as derived from an underlying instrument or market with costs and benefits reflecting financing charges, commission and dividends of the kind that would apply upon fully geared participation in the underlying market.
78The risks of dealing were described in section 8: price volatility, speculative nature, foreign currency exposure, interest rate fluctuation. Clause 8.7 described the segregated account in which money deposited by a client would be kept:
"Any money that you deposit with CMC will be segregated from CMC's money and held and invested in accordance with the CMC Agreement.
However, we are entitled amongst other things to:
· withdraw, deduct or apply any amounts payable by you to CMC and/or any associate of CMC under the CMC Agreement from your moneys held in any segregated account or invested by CMC, including, without limitation, making a payment for, or in connection with, the margining, adjusting or settling of dealings in CMC Products entered into by you or the payment of finance charges, commissions or interest to CMC, with all such amounts belonging to CMC under the CMC Agreement;
· pay, withdraw, deduct or apply any amounts from your moneys held in any segregated account or invested by CMC as permitted by the Australian Client Money Rules,
and to use such moneys in our business from time to time, including for the payment of amounts to our counterparties.
Your moneys may be co-mingled into one or more segregated account with other CMC customer moneys.
We are also obliged to pay any moneys due to you in relation to dealings in CMC Products into a segregated account. Those obligations to you under the CMC Agreement and the CMC Products are unsecured obligations, meaning that you are an unsecured creditor of CMC."
79Clause 11.6 described margin calls as follows:
"If the market moves against you and your equity balance falls below your Initial Margin you have the option to:
· close one or more of your open position(s), in order to reduce your Initial Margin to the required level; and/or
· remit further funds to your Account as deposit in order to maintain the Initial Margin.
This is the first trigger level for margin, referred to as the 'Margin Call', below which you must remit additional funds to maintain your open positions.
Once your equity falls below your Initial Margin requirement, it is advisable that you place a Stop-loss order with us to try to avoid a deficit balance on your account. Our policy is not to provide credit facilities on any Accounts." (emphasis added)
The emphasised part of cl 11.6 is to be noted.
80In section 9, clauses 9.3 and 9.4 described a customer's obligations and an equity shortage, as follows:
"9.3 Customer's obligations
Your responsibilities under the CMC Agreement, including, but not limited to monitoring your positions and maintaining the required margin at all times under apply 24 hours a day.
9.4 Equity shortage
You will not be allowed to deal in CMC Products except to reduce your open positions when there is a shortfall in your Account equity until such time as the equity balance is in excess of the required minimum equity balance. This is in addition to all other rights CMC has in such circumstances."
81All of the above was to a degree descriptive; nevertheless, together with cl 19 ("CMC Terms of Business"), it formed part of the "CMC Agreement" as defined in the Glossary. The introduction to cl 19 provided that CMC "will provide Services to you ... on the terms of":
"A. these Terms of Business (including the Schedules);
B. the current Parts 1 and 2 of CMC's PDS;
C. the current FSG; and
D. any additional terms and conditions issued by CMC in connection with the Services, which together are referred to as this 'Agreement'."
82The "Services" that would be provided and the terms on which they would be provided are set out in "Part 1 - General" of cl 19 in cll 3-12.
83Clause 19 - Terms of Business, cl 3, entitled "Services", was in the following terms:
"3.1 Dealing Services: Subject to the Customer fulfilling their obligations under this Agreement, CMC may enter into transactions with the Customer in the following investments and instruments:
(a) spot contracts for differences on single securities, baskets of securities, stock or other indices, currencies, Treasury Products, base and precious metals and commodities;
(b) forward contracts for differences on single securities, baskets of securities, stock or other indices, currencies, Treasury Products, base and precious metals and commodities;
(c) OTC options to acquire or dispose of any of the instruments falling within (a) or (b) above, including warrants; and
(d) such other Derivatives as CMC may from time to time agree in writing.
3.2 Dealing as principal: In relation to any Contract, CMC will enter into such Contract as principal.
3.3 The Customer will, unless otherwise agreed in writing, enter into Contracts as principal. If the Customer acts on behalf of a principal, whether or not the Customer identifies that principal to CMC, CMC will not accept that principal as a 'client' (as defined in the Corporations Act), unless otherwise agreed in writing.
3.4 Advice: CMC will not provide any personal financial product advice to the Customer. If CMC enters into a Contract with the Customer this should not be taken by the Customer to mean that CMC recommends, or concurs with the merits of, the Contract or that the Contract is suitable for the Customer.
3.5 CMC may provide information or general financial product advice to the Customer. Any information or general financial product advice that CMC gives the Customer will not take into account the Customer's particular needs, objectives and financial circumstances. In particular, CMC will not give the Customer advice about whether the Customer should open, hold or close a Contract.
3.6 Before a Customer makes a decision, CMC recommends the Customer take into consideration whether any information or general financial product advice given by CMC is appropriate to the Customer's particular needs, objectives and financial circumstances, and if not, they should ask their financial adviser for personal financial product advice.
3.7 To the maximum extent permitted by law, CMC will not in any way be liable for any damages, loss or injury suffered or incurred by the Customer as a result of or arising out of, or in connection with:
(a) any misinterpretation of any information or general financial product advice provided by, or on behalf of, CMC relating to a transaction entered into or proposed to be entered into by a Customer pursuant to this Agreement;
(b) any information or general financial product advice provided by, or on behalf of, CMC in relation to any investments and instruments which the Customer may deal in under the Agreement,
but this clause 3.7 will have no operation with respect to any fraud or dishonesty of CMC." (emphasis in original)
84Thus, the services were the entry as principal into contracts with a customer and the provision of information and general product advice. It will be necessary to return to this definition in dealing with the third issue.
85Clause 19 - Terms of Business, cl 5, concerned pricing. Clauses 5.1 and 5.2 were as follows:
"5.1 CMC will quote prices which provide an indication of the prices at which it is prepared to deal with a Customer. Customers should note that:
(a) CMC acts under this Agreement as a market maker, and accordingly, sets the applicable price at which it is prepared to deal with a Customer; and
(b) prices that may be quoted and/or traded upon from time to time by other market makers or third parties do not apply to trades and dealings between CMC and the Customer.
5.2 Except where:
(a) CMC exercises any of its rights to close out a Contract; or
(b) a Contract closes automatically;
it is the Customer's responsibility to decide whether or not they wish to deal at those prices. If the Customer decides to deal at the prices indicated by CMC, it may make an offer to CMC to deal at that price. CMC may choose, in its absolute discretion, whether to accept or reject any offer to deal made by any Customer."
Thus, the customer placed an order for a Contract at a quoted price which CMC accepted or not in its discretion.
86Clause 19 - Terms of Business, cl 7, concerned the customer's obligation to monitor and pay margins. Clause 7.1 was as follows:
"7.1 Customer's obligation to pay: The Customer must pay to CMC:
(a) such sums of money by way of deposits or margin as CMC may require under this Agreement, including but not limited to such margin rates as are specified in the Rates Schedule and subject always to the Minimum Equity Balance;
(b) such sums of money as may from time to time be due to CMC under a Contract (including, without limitation, charges specified in the Rates Schedule from time to time) and such sums as may be required in or towards clearance of any debit balance on any Account; and
(c) such sums of money as CMC may from time to time require as security for the Customer's obligations to CMC."
Thus, cl 7.1 of cl 19 is to be read with cl 8.7 in respect of the operation of the segregated account referred to above and with cll 9.5, 12.4, 17 and 18.11 of cl 19 - Terms of Business, below.
87Clause 19 - Terms of Business, cl 7.15, dealt with the time for forwarding of money as follows:
"For the avoidance of doubt, CMC is not obliged to allow the Customer time to forward further funds to meet such margin as is required under this clause 7 before exercising its right to close out the Customer's positions under this Agreement. However, CMC may in its absolute discretion allow the Customer time to forward funds so as to meet their margin requirements, in which event that permission is only effective once it is confirmed in writing by CMC, and only to the extent specified in the written notice given by CMC."
This clause provided for the possible granting of time to pay as an indulgence in the "absolute discretion" of CMC.
88Under cl 19 - Terms of Business, cl 8, CMC had wide power to close out all or part of a customer's positions, to limit the size of open positions and to refuse orders for new positions.
89Clause 19 - Terms of Business, cl 9, referred to the obligation to hold money in segregated accounts which were pooled customer accounts, the interest benefits from which accrue to CMC. Clause 9.5 provided for the authority given by the customer to CMC to debit the segregated account for the customer's payment obligations as follows:
"9.5 The Customer irrevocably and unconditionally authorises CMC and/or any Associate of CMC to:
(a) withdraw, deduct or apply any amounts payable by the Customer to CMC and/or any Associate of CMC under this Agreement from the Customer's moneys held in any segregated account or invested by CMC, including, without limitation making a payment for, or in connection with, the margining, adjusting or settling of dealings in Contracts entered into by the Customer or the payment of interest or finance charges to CMC, it being acknowledged and agreed by the Customer that such amounts belong to CMC under this Agreement and may be used by CMC in its business from time to time, including for the payment of amounts to CMC's counterparties;
(b) pay, withdraw, deduct or apply any amounts from the Customer's moneys held in any segregated account or invested by CMC as permitted by the Australian Client Money Rules, it being acknowledged and agreed by the Customer that any such amounts that belong to CMC may be used by CMC in its business from time to time, including for the payment of amounts to CMC's counterparties;
(c) deal with any property, other than money, given to CMC in accordance with the terms and conditions of this Agreement, including, without limitation:
(i) dealing with such property in connection with the margining, adjusting or settling of dealings in Contracts entered into by the Customer; or
(ii) selling or charging in any way any or all of the Customer's property which may from time to time be in the possession or control of CMC or any of CMC's Associates following the happening of a Specified Event;
(d) deal with any property, other than money, given to CMC as permitted by the Australian Client Money Rules."
As to the summary of this, see cl 8.7 set out above. CMC was entitled to deduct from the segregated account any moneys that the customer was obligated to pay. Thus, as soon as a customer was obliged to pay money to CMC it could be deducted from the segregated account. This was reinforced expressly in cll 12.2-12.4 of cl 19 - Terms of Business, and cll 17 and 18.11 below.
90Clause 19 - Terms of Business, cl 12, concerned payments. Clauses 12.2-12.5 provided as follows:
"12.2 If on any date the same amounts are payable under this Agreement in respect of the same Account by each party to the other in the same currency, then, on such date, each party's obligations to make payment of any such amount will be automatically satisfied and discharged.
12.3 If the aggregate amount that is payable by one party exceeds the aggregate amount that is payable by the other party in the same currency, then the party by whom the larger aggregate amount is payable must pay the excess to the other party and the obligations to make payment of each party will be satisfied and discharged.
12.4 Unless specified otherwise in this Agreement, all amounts due to CMC (or agents used by CMC) under this Agreement will, at CMC's option:
(a) be deducted from any funds held by CMC for the Customer; or
(b) be paid by the Customer in accordance with the provisions of the relevant difference account, Contract Note or other advice, such as t he daily or monthly statement.
12.5 If the Account shows a credit balance, the Customer may request CMC to send to the Customer a cheque or effect payment by alternative means in respect of such amount as the Customer may specify. However, CMC may at its discretion elect to withhold any payment requested (in whole or in part) due to the Customer if:
(a) open positions on the Account show notional losses; and/or
(b) CMC reasonably considers that funds may be required to meet any current or future margin requirement on open positions due to underlying market conditions; and/or
(c) in accordance with clause 32.3 of this Agreement, the Customer has any contingent liability to CMC or to any of its Associates in respect of any other account of the Customer opened with them; and/or
(d) CMC reasonably determines that there is an unresolved dispute between CMC and the Customer in connection with this Agreement or any related Contract; and/or
(e) CMC considers it necessary or desirable to enable CMC to comply with its regulatory or legal obligations,
and CMC will, except where clause 12.5(e) of this Agreement applies, notify the Customer as soon as reasonably practicable if it decides to take action."
91Part II of cl 19 was entitled "Spot Contracts for Difference". Clauses 13-19 of cl 19 were additional to the general clauses in Part I of cl 19. All of the relevant arrangements the subject of the charges were Spot contracts for difference.
92Clause 19 - Terms of Business, cl 13, defined a "Spot" somewhat more elaborately than the definition in the Glossary as:
"'Spot' means any Contract, other than a Forward, which is a contract for difference entered into between CMC and the Customer with the purpose of securing a profit or avoiding a loss by reference to fluctuations in the price of underlying property or an index (the 'Underlying')." (emphasis in original)
93Clause 19 - Terms of Business, cl 14, then described "the purpose of a Spot", as follows:
"14.1 The purpose of a Spot is to secure a profit or avoid a loss by reference to fluctuations in the price of the underlying property or an index (the 'Underlying'). In the context of the Services, the Underlying may be:
(a) a single Security or Grey Market Security;
(b) a basket of Securities;
(c) an Index;
(d) an exchange rate between two currencies;
(e) a Treasury Product,
(f) a base or precious metal;
(g) a commodity;
(h) such other investment as CMC may from time to time agree in writing.
14.2 CMC and the Customer agree that it is an express term of each Spot that:
(a) neither party:
(i) acquires any interest in or right to acquire; and
(ii) is obliged to sell, purchase, hold or deliver or receive: Securities, Related Securities, Grey Market Securities, Related Index Futures Contracts, currencies, Treasury Products, base or precious metals or commodities or any other underlying investment by virtue of any Spot; and
(b) the rights and obligations of each party under the Spot are principally to make and receive such payments as are provided for in this Part II of this Agreement and on any Contract Note."
It is to be noted that profit is secured "by reference to fluctuations in the price of the underlying property or an index", but there is no obligation to deliver such underlying property. The profit (or the loss) is made by reference to payment obligations under the contract. This provision is central to the proper characterisation of these CFDs: They are not contracts to buy or sell either the underlying security or any asset of CMC; rather, they are contracts to pay money by reference to the terms of the contract and by reference to fluctuations in the underlying price against the chosen contract price.
94Clause 19 - Terms of Business, cl 15, dealt with pricing: CMC quoted a price "on which the Customer may offer to trade". CMC could amend the quote or accept the offer.
95Clause 19 - Terms of Business, cl 16, dealt with margin calculations.
96Clause 19 - Terms of Business, cl 17, dealt with the mechanism of accounting on each day. This clause is also critical to understanding the nature, characterisation and operation of the contract. At the close of business each day, commencing on the date of the transaction and during each business day "during the term of the Spot", CMC would do the following:
"17.2 CMC will determine the Underlying Contract Price in accordance with paragraph 3 of the relevant part of the Schedule.
17.3 CMC will calculate the Contract Value, which will equal:
Underlying Contract Price x Contract Quantity
17.4 If on the date of the transaction:
(a) the current Contract Value exceeds the Opening Value, the Short Party will pay to the Long Party such excess;
(b) the Opening Value exceeds the current Contract Value, the Long Party will pay to the Short Party such excess.
If, on any Business Day during the term of the Spot (including the Closing Date):
(c) the current Contract Value exceeds the Contract Value on the preceding Business Day, the Short Party will pay to the Long Party such excess;
(d) the Contract Value on the preceding Business Day exceeds the current Contract Value, the Long Party will pay to the Short Party such excess.
17.5 Where the Customer is the Long Party and express reference is made in the Rates Schedule to interest payable by the Customer, CMC will debit from the Account an amount equivalent to the overnight interest to the next Business Day equal to the Relevant Interest Rate plus the relevant Interest Percentage on the Contract Value. Such debit amount will accrue for each day or part day (taking the annual rate divided by 365 or 360 according to relevant practice) up to and including the Settlement Date.
17.6 Where the Customer is the Short Party and express reference is made in the Rates Schedule to interest receivable by the Customer, CMC will credit to the Account an amount equivalent to overnight interest to the next Business Day equal to the Relevant Interest Rate minus the relevant Interest Percentage on the Contract Value. Such credit amount will accrue for each day or part day (taking the annual rate divided by 365 or 360 according to relevant market practice) up to and including the Settlement Date.
17.7 Any payments due under this clause 17 will, subject to clause 18.11 of this Agreement, be made by CMC adjusting the Account with effect immediately after Close of Business of the relevant Business Day."
97Clause 18.11 was in the following terms:
"18.11 Any payment due by either CMC or the Customer under clause 17 of this Agreement or this clause 18 in respect of dates on or after the Closing Date will be made by CMC adjusting the Account at Close of Business on the Settlement Date."
Thus, on each day calculations would be made by reference to daily prices as to the value of the contract in question, including by reference to interest in the Rates Schedule. This calculation of contract value gave rise to immediate daily payment obligations by CMC or by the customer. If the payments were obliged to be made by the customer, the provisions of cll 12.2-12.5 of cl 19 and cl 8.7 would apply and deductions would be made from the segregated account and, if necessary, a margin call made. No giving of credit was involved. An obligation to pay (or an entitlement to receive) by the customer arose at the end of each day and payment was made immediately (or credit received immediately).
98Clause 19 - Terms of Business, cl 17.2, refers to the "relevant part of the Schedule". At the end of the clauses in cl 19, there are five schedules. The first contains further definitions (cl 1.1), which included definitions relevant to the above.
99For the purposes of cl 19 - Terms of Business, cl 17.2, paragraph 3 of Part 1 of the first schedule dealt with "close of business accounting". It set out how the Underlying Contract Price of a Spot" would be calculated:
"3.1 Traded Securities: The Underlying Contract Price of a Spot on a single Security will equal the mid market price of the relevant Security at the close of trading on the relevant exchange on such Business Day.
3.2 If such Underlying Contract Price is determined on a day on which the exchange on which the relevant Security has its primary listing is closed, it will equal the mid market price of the relevant Security at the close of trading on the preceding Business Day for which such exchange was open.
3.3 The Underlying Contract Price of a Forward on a single Security will be a mid price calculated under paragraph 2.4 above.
3.4 Baskets: The underlying Contract Price of a Spot on a Basket will equal the weighted sum of the mid market prices of the constituent Securities at the close of trading on the relevant exchange on such Business Day.
3.5 If such Underlying Contract Price is determined on a day on which the exchange on which each constituent Security has its primary listing is closed, it will equal the mid market price of the constituent Securities at the close of trading on the preceding Business Day for which such exchange was open.
3.6 The Underlying Contract Price of a Forward on a Basket will be a mid price calculated under paragraph 2.7.
3.7 Grey Market Securities: The Underlying Contract Price of a Spot or Forward on a Grey Market Security will be a mid price calculated under paragraph 2.10 above.
3.8 Indices: The Underlying Contract Price of a Spot or Forward on an Index will be a mid price calculated under paragraph 2.13 above."
100The references to paragraphs 2.4, 2.7, 2.10 and 2.13 were to paragraphs in the preceding clause dealing with CMC listings, as follows:
"2.4 The Underlying Contract Price of a Forward on a single exchange traded Security to which Limited Hours Trading applies will be a bid or offer price (whichever is applicable) calculated by CMC in accordance with paragraph 2.3 and adjusted by CMC as it considers representative, fair and reasonable to take account of the Relevant Interest Rate differential to the Specified Date and, in accordance with paragraph 5.2 below, any dividends or distributions accruing before or on the Specified Date.
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2.7 Baskets: subject to paragraphs 2.9 and 5, the Underlying Contract Price of a Spot or Forward on a Basket will be a bid or offer price (whichever is applicable) calculated by CMC by applying the CMC Spread to the weighted sum of the mid prices of the constituent Securities in accordance with the companies' market capitalisations.
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2.10 Grey Market Securities: The Underlying Contract Price of a Spot or Forward on a Grey Market Security will be determined by CMC (acting reasonably) with reference to any publicly available price or range of prices, as adjusted by CMC from time to time having regard to the trading positions of CMC's customers in such Spot or Forward.
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2.13 Indices: The Underlying Contract Price of a Spot or Forward on an Index will be a bid or offer price (whichever is applicable) calculated by CMC by applying the CMC Spread to the market price determined by CMC to be representative, fair and reasonable having regard to the current price of any Related Index Futures Contract and any other matter reasonably considered by CMC to be appropriate."
101Clause 19 - Terms of Business, cl 18, dealt with closing a Spot. A Spot closed automatically five years after it was entered into: cl 18.3 and para 4 of Pt 1 of the first schedule. A customer could give instruction to close a Spot by entering an equivalent and opposite trade. CMC could close out a Spot if it had a right to do so under the agreement: see cl 18.1. The relationship between closing a Spot and the calculation of the Underlying Contract Price for Spot for cl 19 - Terms of Business, cl 17.2, and para 3 of Pt 1 of the first schedule is apparent from cl 19 - Terms of Business, cll 18.7, 18.8 and 18.9. Clause 18.7 provided that, subject to cll 18.8 and 18.9:
"... a Spot will close automatically at Close of Business on each Business Day and be replaced by an equivalent Spot with effect immediately after Close of Business on such Business Day provided that this will not affect the automatic closing of a Spot under clause 18.3 of this Agreement, such that the 5 year period will run from the date on which the Spot was first entered into, and provided further that when such Spot closes automatically under clause 18.3 of this Agreement, it will not be reopened in accordance with this clause 18.7 of this Agreement."
Thus the determination of the daily Underlying Contract Price and of daily payment obligations was contractually effected by closing out (automatically and without the need to enter an actual contract) each outstanding position and replacing it with an equivalent Spot immediately thereafter (automatically and without the need to enter an actual contract). Thus, the immediately arising daily obligation to pay or entitlement to receive money arose from the daily closing out of the Spot position.
102Clauses 18.8 and 18.9 reflect how this automatic closing out worked where a customer had long and short positions and two or more Spots:
"18.8 If the Customer is long and short a Security or an Index (irrespective of the date on which either Spot closes automatically under clause 18.3 of this Agreement), CMC will, with effect immediately after Close of Business on the Closing Date, close the relevant long and short Spots and record in the Account the balance (if any) of the Customer's then outstanding long or short position in that Underlying, as appropriate. If there is more than one Spot in relation to the particular Underlying, CMC may close out whichever Spot it considers appropriate.
18.9 Where the Customer has two or more Spots:
(a) which are in respect of the same Underlying; and
(b) where the Customer is in all such Spots either the Long Party or the Short Party; CMC will, with effect immediately after Close of Business on each Business Day replace such Spots with a single aggregated Spot equivalent to the total of the Contract Quantities of each such Spot. The date on which such replacement Spot will expire automatically under clause 18.3 of this Agreement will be the latest of the expiry dates of each of the original Spots."
103The appellants argued that the above legal relationship amounted to a credit facility. The argument was that the taking of an open position gave rise to the liability of a customer for the price of the subject of the contract. The obligation to pay this price was deferred by payment of a deposit until a margin was called for or until a closing by the acquisition of a contra position. Thus, the balance of the purchase price was a debt. Emphasis was placed on the explanation in cl 2.1 that "buying and selling the performance of a securities or index using a CFD is similar to buying the actual underlying instrument using a loan". See generally cl 2.1 above.
104That, with respect, is too simplistic, and it is wrong. There was no provision which provided for the delivery of property, whether chose in action or physical. Rather, to use the language of cl 1.4, by a contract, the customer "opens a position" or does "a deal". Initial and Variation Margins were required to be paid. These were a percentage of the value of the Product. The legal rights of the parties, reflecting the underlying commercial purpose, were to receive or pay money from day to day by reference to the difference between the price agreed at the buying or selling of the CMC Product and the underlying asset. The nature of the contract as one to "deal" is made clear by cl 1.4, cl 1.17 and by cl 19 - Terms of Business, cll 3.1, 5.1, 13 and 14, noting in particular cl 14.2. In cl 2.1, the expression "buying and selling the performance of a securities or index" is used. It reflects the nature of the contract - not to buy or sell an asset for a deferred price, but to open a position by reference to which a future fluctuating price will cause a profit or a loss by the engagement of payment obligations, based on the daily comparison between the contract price and the fluctuating price.
105There was no obligation upon the customer to pay for any asset bought or to receive money for any asset sold. The concepts of buy and sell are embedded within being "long" or "short". Each is a notional concept: see the definitions of "Long Party" and "Short Party" in Schedule 1 to cl 19 - Terms of Business. The customer's obligations to pay are in cl 19 - Terms of Business, cl 7.1: deposits, margins, sums due from time to time under a Contract, sums to clear a debit balance and sums as security. There is no provision for payment of a price. The sums due from time to time under a contract, for Spot contracts, are calculated under cl 19 - Terms of Business, cll 17 and 18. Each day, a contract value is assessed by reference to the price at which the arrangement was entered and the underlying contract price. This was effected by the automatic closing of the Spot and its replacement by an equivalent Spot. Immediate payment obligations (whether by the customer or CMC) then arose; and payment would be immediately effected - not of a deferred price, but by reference to a difference at the close of the day (or, if closed earlier, at that earlier time). As to immediate payment, see cll 8.7, 9.3, 9.4 and 11.6 and cl 19 - Terms of Business, cll 7, 9, 12, 17 and 18.
106The payment obligations incorporated (if there is a position open overnight) a calculation of interest, whether debited to a "Long Party" or credited to a "Short Party". This is the amount "equivalent to the overnight interest": cl 19 - Terms of Business, cll 17.5 and 17.6. The interest rate is debited or credited to the "total notional value of the position": cl 2.2. This is not a credit charge for money lent or foregone by either CMC or the customer. The total notional value represents the full potential loss on the face of a position if the underlying asset was without value. Charging interest on "notional value" enabled the CMC Product and the risks involved to mimic a fully geared transaction in relation to the underlying asset.
107The treatment of dividends also reflects the attempt to treat the contractual rights of the parties in respect of making and receiving payments under the contract (see cl 19 - Terms of Business, cl 14.2) close to the underlying security. Thus, an adjustment will be made to the Account by reference to a dividend or distribution attributable to any security on which a Spot is based: cl 19 - Terms of Business, Schedule 1, Part I, cl 5.
108There was no lending of money; there was no deferred price for property. As was stated in cl 11.6, CMC's "policy is not to provide credit facilities on any Accounts". The object of the Spot CFD is clearly stated in cl 19 - Terms of Business, cl 14: it is not to buy or sell property for a price, but to pay or receive money by the operation of the contract. The legal and accounting mechanisms of that can be seen in cl 19 - Terms of Business, cll 17 and 18.
109Turning to the definitions of "credit facility" and "credit" in the regulations. Analysed thus, no deferral of the payment of a debt occurred, and there was no form of financial accommodation, for any period whatsoever. No part of the definitions set out above was engaged.