Diploma of Share Trading and Investment
Course Code: 69863

Compare Macquarie Prime to CFDs

Over the past few years, CFDs have become a popular way to trade Australian shares on a geared (or "leveraged") basis. However, CFDs are often less than ideal for investment in Australian shares.

Now consider Macquarie Prime. It’s superior to a CFD because the benefits are broader to a wider group of investors. Investors can enjoy all benefits associated with CFDs together with tangible cost and potential tax efficiencies. Macquarie Prime allows geared and non-geared share trading on over 1,800 Australian shares to cater for both long term investors as well as active traders.

	Prime	CFD
Long and short positions
Gearing up to 95%
Optional Guaranteed Stop-Loss protection
Share ownership
Access to Franking Credits
Choose your own gearing level
Long and short funding offset
Loan and Cash offset
Optional Interest prepayment
Access to more than 1,800 ASX shares
Transfer existing share holdings

The table below outlines the considerable difference in cost from holding a $500,000 geared share portfolio for 1 year in a Macquarie Prime Facility versus CFDs.

	Prime	CFD
Positions
Long Positions	$325,000	$325,000
Short Positions	$175,000	$175,000
Funding Account Balance	-$150,000
Cash
Collateral @ 10%	$50,000	$50,000
Available Cash	$25,000	$25,000
Total Cash	$75,000	$75,000
Interest Balance	-$75,000
Interest
Interest paid @ 8.75%	$6,563	$28,438
Interest received at 3.75%		$6,563
Interest earned on Australian Cash that is not offset against loan @ 6.25%		$1,563
Net Interest Cost	$6,563	$20,313
Dividends
Dividends received on long positions	$11,245	$11,245
Franking credits	$4,819
Dividend amounts paid on short positions	$6,055	$6,055
Net Dividends	$10,009	$5,190
Stock Borrowing Fee	$4,375
Total Holding Cost	$928	$15,123

The above example is illustrative only and is not a forecast or prediction of future performance. This example assumes the value of your long and short positions remain constant for interest calculations.

Dividends and franking credits - the example uses a dividend yield of 3.46% based on the average dividend yield of the constituents of the S&P ASX 500 index for 2006. All dividends are assumed to be fully franked and the investor is assumed to be a qualified person. For short positions, it is assumed that offshore stock borrowing is available. To be eligible for franking credits paid on shares resident tax payers are required to:

Share Ownership and Prime

One significant advantage of Macquarie Prime over CFD products is beneficial share ownership. Having actual share ownership gives you voting rights, the ability to transfer existing share holdings and different tax outcomes.

Naturally, the tax treatment of a shareholder substantially differs to that of CFD holder. There is the potential for you to access*:

• Franking credits#
• Concessional CGT treatment for long positions held for greater than 12 months*

This table highlights the potential dividend yields and franking credits of shares held through the Macquarie Prime Facility compared to CFDs.

	Prime	CFD
Positions
Long Positions	$325,000	$325,000
Short Positions	$175,000	$175,000
Dividends
Dividends received on long positions	$11,245	$11,245
Potential Franking credits	$4,819
Dividends paid on short positions	$6,055	$6,055
Net Dividends	$10,009	$5,190

Example assumes a dividend yield of 3.46%, fully franked. For short positions, it is assumed that offshore stock borrowing is available. Example does not include the effect of fees or taxes.

You can see the potential franking credits are significantly greater from holding shares in the Macquarie Prime Facility as opposed to a CFD holding.

Macquarie Prime may give you access to franking credits which can increase your returns.#

Choose your own level of gearing

Macquarie Prime is a highly flexible facility that enables you to choose your own effective gearing level.

Your level of gearing can be varied, by varying the level of cash in your Macquarie Prime Cash Account. Choosing your own level of gearing enables you vary the risk associated with gearing.

Additionally your interest varies in line with your gearing level as interest is calculated after offsetting your Cash Account Balance with your Funding Account Balance.

The table below illustrates various levels of gearing on a $100,000 long position investment with different Cash Account Balances. Interest is calculated on your Interest balance after offsetting your cash balance.

Fee Schedule	Funding Account Balance	Cash Account Balance	Interest Balance	Effective Gearing Ratio
$100,000	-$100,000	$100,000	-	0%
$100,000	-$100,000	$50,000	-$50,000	50%
$100,000	-$100,000	$25,000	-$75,000	75%
$100,000	-$100,000	$15,000	-$85,000	85%
$100,000	-$100,000	$5,000	-$95,000	95%

Long and Short Funding Offset

With Macquarie Prime, you pay and receive interest on your Interest Balance. Your Interest Balance takes into account your Funding Account Balance, looking at both long positions and short positions, and the level of funds in your Macquarie Prime Cash Account.

All long positions will be funded from your Funding Account. However all the cash generated from short positions will be paid into your Funding Account. Having one net funding account can potentially reduce your interest costs.

The table below gives you an idea of the comparative costs when there are long and short positions in your portfolio with Macquarie Prime versus CFDs over the period of one year. The table considers the interest cost prior to offsetting any Cash Account Balance.

	Prime	CFD
Positions
Long Positions	$325,000	$325,000
Short Positions	$175,000	$175,000
Funding Account Balance	-$150,000
Interest
Interest paid @ 8.75%	$13,125	$28,438
Interest received at 3.75%		$6,563
Net Interest Cost	$13,125	$21,875

In addition to the interest cost, your short positions would attract a stock lending charge. This is payable on the face value of short positions. In this table, the $175,000 short position would attract a stock lending charge of $4,375 for the year at rate of 2.50% p.a.

Macquarie Prime is considerably more cost effective than CFDs when you have short positions in your portfolio.

Loan and Cash Offset

By integrating Macquarie Prime with your Macquarie Prime Cash Account, you create a cost effective investment solution where all of your investment cash is used to offset any borrowings.

For example: if you have a Funding account with a balance of -$150,000 and a Cash Account with a balance of $75,000, in effect, you will only pay interest on your Interest Balance of -$75,000.

Loan and cash offset means you can use all of your cash being used for collateral and all of your surplus cash to offset your borrowing and reduce your interest costs.

This table illustrates the comparative interest benefit from cash in Macquarie Prime versus CFDs over the period of one year.

	Prime	CFD
Positions
Long Positions	$325,000	$325,000
Short Positions	$175,000	$175,000
Funding Account Balance	-$150,000
Cash
Collateral at 10%	$50,000	$50,000
Available Cash	$25,000	$25,000
Total Cash	$75,000	$75,000
Interest Balance
Interest
Interest paid @ 8.75%	$6,563	$28,438
Interest received @ 3.75%		$6,563
Net Interest Cost	$6,563	$20,313

As the table illustrates, the reduction in interest from offsetting total cash against borrowings is significant.

Macquarie Prime reduces your interest by offsetting all of your cash against any borrowing.

Interest Prepayment with Macquarie Prime

Macquarie Prime’s flexibility means you can pre-pay your interest for up to 12 months. This allows you:

• to lock-in a fixed interest rate for up to 12 months
• the potential to claim up to 12 months interest, prepaid prior to 30 June, as a deduction in the current financial year*

A prepayment facility is not currently available with CFDs.

Macquarie Prime allows you to prepay interest and lock in an interest rate for up to 12 months.

Transfer your existing share holdings

You can easily transfer existing share holdings into the Macquarie Prime Facility and unlock your capital without selling off your shares. As you are not disposing the shares, there should be no capital gains tax implications*.

This enables you to move long term existing holdings and maintain your exposure without disrupting your financial plans.

As a CFD is a contract with no beneficial ownership of the underlying share, you cannot convert existing share holdings directly into CFDs - without selling the share holding to purchase the CFD. Of course, this sale will trigger a potential CGT liability.

Macquarie Prime allows you to transfer in existing shares and unlock capital.

Using CFDs with Macquarie Prime

Although CFDs have their limits as an investment tool, they can be very useful for managing the risk of your share portfolio.

Here’s your advantage. It is seamlessly integrated with Macquarie CFDs, so you have the ability to use CFDs to hedge your share positions:

• Without the need for additional collateral
• With profits and losses settling into your Macquarie Prime Cash Account in real time

#Subject to availability, including the 45 day, delta 30 and related payments requirements.

*Macquarie does not give tax advice. How tax laws apply to you depends on your circumstances and you should seek professional taxation advice before investing.

Macquarie Prime can be high risk and is intended for experienced investors. Consider carefully whether a Macquarie Prime Facility, Macquarie Prime Cash Account and/or a Macquarie CFD account, each issued by Macquarie Bank Limited ABN 46 008 583 542 are appropriate for you; talk to a financial adviser; and before investing read the relevant product disclosure statement. Information is current at 21st May 2007 and may change without notice.