The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) announced its intentions to “limit the marketing, distribution and sale of financial contracts for difference (CFDs) with an additional payments obligation” to retail clients.
This means that in theory margin trading could be altogether banned in Germany, as, according to BaFin, the risk of losses for the retail clients are “incalculable”. In its statement the regulator explains that if the difference to be paid by the retail client exceeds the capital they have invested, they must pay the difference amount from their other assets.
"In the case of CFDs with an additional payments obligation, the risk of loss for the investor is incalculable. For consumer protection reasons, we cannot accept that", says Chief Executive Director Elisabeth Roegele, explaining BaFin's decision to intervene.
According to BaFin, the current measures, such as margin call, negative balance protection and stop loss, implemented by some forex and CFD brokers, cannot limit effectively the risk for investors.
“Price fluctuations of an underlying may be so significant within the shortest periods of time that the CFD provider will not have sufficient time to ask the investor for an additional payment on top of the margin they have deposited (margin call),” BaFin noted and clarified that in such cases the position is forcibly closed, but can still bring significant loss. “Neither are stop-loss orders a reliable way for investors to protect themselves from large losses. This is because the next available price at which such an order is normally executed may differ significantly from the price originally strived for. The difference to be paid by the investor can then amount to multiples of the margin they have put down.”, said the regulator.
Currently BaFin's proposal is in the stage of discussion and all interested parties (brokers and traders) have until January 20, 2017 to submit their opinion in writing. The document is published on BaFin's website.
BaFin is the third European regulator to undertake measures and tighten the rules for margin trading and CFDs in the past couple of weeks, after the Cyprus Securities and Exchange Commission and UK's Financial Conduct Authority.
Last month France officially banned the advertising of trading in forex, CFDs with a with a “leverage greater than 5” and binary options offered to retail investors.
This past summer Belgium banned “the distribution” of forex products and binary options in the country.
IG Group, Plus500, CMC Markets react
Following BaFin's proposal, one of the major UK forex and CFD brokers, IG Group, which is also active in Germany, released a statement saying that it has already introduced some measures in that regard, but will seek a meeting with BaFin before responding to the consultation paper.
“The Company considers the BaFin proposal to be consistent with IG’s recent introduction of Limited Risk Accounts, which guarantee that a client cannot incur losses in excess of the amount deposited in their account,” IG Group said. “IG will carefully consider the full implications of the BaFin announcement and will be seeking to meet with BaFin before responding to the consultation, in accordance with the timeline provided of 20 January 2017.”
Another major forex and CFD broker, Plus500, also deemed necessary to expressed an opinion on the matter and released a statement welcoming BaFin's plans and noting they will not affect its business.
“Plus500 welcomes the announcement made by BaFin as all accounts offered by the Company have always had balance protection, meaning the client cannot lose more than the value of their account,” Plus500 said. “The Company therefore believes that any limitations imposed by BaFin in this respect will have no effect on its business.”
CMC Markets also received well BaFin's “balanced approach” and said the eventual ban on the marketing, distribution and sale of CFD products with high risk to retail clients would not affect it.
“The BaFin consultation paper requires CFD providers to ensure that retail clients cannot lose more money than is deposited in their account, a functionality which is already available to CMC Markets clients in Germany,” said CMC Markets. On the basis of the consultation paper, there are no other requirements from BaFin including no leverage limits, and where retail clients' risk is limited to their deposits, there is no prohibition on marketing, distribution and sale of CFDs.
CMC is the leading provider in Germany and has had the largest retail CFD market share, based on the latest independent Investment Trends research, since the start of the study in 2011.