The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) has issued a General Administrative Act (Allgemeinverfügung) limiting the marketing, distribution and sale of contracts for difference “CFDs” to retail clients within the meaning of section 31a (3) of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG). The marketing, distribution and sale of CFDs to retail clients within the meaning of section 31 (3) WpHG) shall be prohibited in the event the CFDs give rise to an additional payment obligation. This limitation has to be implemented by 10 August 2017.
One key characteristic of CFDs is upon opening a CFD position the investor is not required to have the entire contract amount on their CFD account. Instead, the CFD provider accepts the investor putting down only a fraction of this amount. In this way, the retail investor’s willingness to speculate is purposefully encouraged according to BaFin. However, if the margin held on the client’s CFD trading account is insufficient to pay for the losses incurred, the client must pay for the losses using their other assets (the additional payment obligation), which should be banned in future.
On 8 December 2016, BaFin published the draft General Administrative Act and gave participants the opportunity to comment on the matter by 20 January 2017. In total, BaFin received 30 responses during the formal consultation procedure. The submissions came from CFD providers, citizens, lawyers and stakeholders. Among others, one especially important argument against BaFin’s General Administrative Act was that the use of stop-loss orders, especially guaranteed stop-loss orders could limit the investor’s risk of losses. Therefore, a limitation of the marketing, distribution and sale of CFDs by BaFin would not be necessary.
BaFin dismissed this argument and stated: “If the retail investor places a stop-loss order with the CFD provider to limit their losses, the CFD provider is only obliged to execute this order at the “next available” price of the underlying. Significant losses may also be incurred by the retail client upon execution of the stop-loss order. This is because execution at the “next available” price means that the price used to calculate the difference owed by the retail client may differ significantly from the price set by the retail investor as the threshold which triggers the closing of the position. Here, too, the price of the underlying may fluctuate so much within the shortest periods of time that the “next available” price can catapult the difference to be paid by the retail investor to multiples of the capital they originally invested.
A small number of CFD providers also offer a guaranteed stop-loss order, which functions like a regular stop-loss order except that closure of positions at the indicated price is guaranteed irrespective of market volatility or gapping. The extent of the retail investor’s risk of loss cannot be limited in all instances through the use of guaranteed stop-loss orders. An effective limitation of the risk of loss could only be achieved if guaranteed stop-loss orders would be actually mandatory for all positions held by the investor. If they remain only optional for investors, inexperienced investors in particular could be prevented from using a guaranteed stop-loss order owing to a lack of knowledge on their part of the risks or owing to additional costs. In addition, in individual cases the specific conditions offered by the provider may include exceptions, e.g. for unusual market conditions or interventions in the market from outside, and thereby further reduce the protective effect. A guaranteed stop-loss order is also placed by the investor for a particular limit. This limit may be set too high or too low, which means that a guaranteed stop-loss order does not offer any effective limitation of the risks for the investor. Overall, a guaranteed stop-loss order does not offer the same protection as an elimination of the additional payments obligation for all CFD accounts held by retail investors.”
Objections to the General Administrative Act can be submitted to BaFin in Bonn or Frankfurt am Main within one month of its publication.
German articles on this topic can be found here, here and here.