08 December 2016

BaFin plans to limit CFD trading

In order to protect retail investors, the German Federal Financial Supervisory Authority intends to limit the marketing, distribution and sale of financial contracts for difference (CFDs).

Contracts with an additional payments obligation could then no longer be offered to retail clients. BaFin published a draft General Administrative Act on the matter.

BaFin has investor protection concerns in relation to financial contracts for difference with an additional payments obligation for retail clients. 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.

BaFin is of the view that the risk of loss for the investor cannot be limited effectively through the margin call process or through stop-loss orders. 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). In such instances, the investor's position will be forcibly closed, sometimes resulting in very significant losses. 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.

With financial contracts for difference, investors speculate on the performance of underlying instruments such as indices, shares, commodities, currency pairs or interest rates. Compared to a direct investment, the capital invested is small. Positive and negative price changes are mirrored by the CFD. If the deviation is positive, the investor receives the difference amount; if the deviation is negative, they must pay the difference. The European Securities and Markets Authority (ESMA) most recently issued an investor warning on CFDs in July 2016. Such products came to the public's attention primarily as a result of the "Swiss franc shock" at the beginning of 2015, when the Swiss National Bank abandoned the cap on the Swiss franc's value against the euro and many CFD investors suffered major losses as a result of having to subsequently make additional payments.

Comments on the draft may be submitted in writing until 20 January 2017.

Draft Act

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