The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) makes use of its product intervention powers under the European Markets in Financial Instruments Regulation (MiFIR): Under a general administrative act (Allgemeinverfügung) dated 30 September 2022 (link to English convenience translation), BaFin prohibited the marketing, distribution and sale of futures to retail clients domiciled in Germany – subject, however, to three exceptions.
Background: Additional payment obligations
Based on the findings of a market survey, BaFin determined an increase of the volume of futures traded by retail clients. The regulator expects a further market growth in this sector and, in particular, anticipates that the number of retail clients who trade so-called mini and micro futures will continue to increase.
Despite this popularity of futures among retail clients, BaFin has considerable investor protection concerns with regard to futures because of the risk that retail clients can lose more capital than they have invested. In this regard, the regulator refers to the legal and economic consequences resulting from additional payment obligations (Nachschusspflichten) for retail clients.
Such additional payment obligations arise if the collateral to be provided by retail clients for futures trading (margin) is insufficient to compensate for losses incurred, even after any forced liquidation or the liquidation of other futures contracts, and the retail clients must make good these losses from their other assets. When retail clients receive a margin call, they must top up their margin account held with their intermediary to the level of the initial margin. If the retail client does not make any additional payment, the broker closes out the position by liquidating the contract. If the loss arising from such close-out is not covered by the margin, the intermediary may require the retail client to make an additional payment.
Scope of prohibition
The general administrative act is addressed to investment firms seated either in Germany or in a member state of the European Economic Area (EEA). Such investment firms are subject to BaFin’s prohibition if they market, distribute or sell futures to retail clients domiciled in Germany or intend to do so in the future.
The product intervention measure relates to retail clients within the meaning of the revised European Markets in Financial Instruments Directive (MiFID II) as transposed into national German law.
The futures covered by the prohibition are defined as unconditional exchange-traded forward transactions. Over-the-counter (OTC) forward transactions therefore do not fall within the scope of the general administrative act.
Exceptions from prohibition
BaFin’s prohibition is subject to the following three exceptions:
- Contractual exclusion of additional payment obligations: Retail clients can continue to trade futures if additional payment obligations are contractually excluded by the investment firm and the loss of retail clients is therefore limited to the funds they deposit with the investment firm for futures trading.
- Hedging transactions: Retail clients can also continue to trade futures if they confirm to the investment firm for each futures transaction that they are purchasing the future or the futures contracts solely for hedging purposes before entering into the transaction. BaFin has suggested a template wording for such confirmation.
- Closing out existing futures positions: Futures that are purchased exclusively for the purpose of closing out existing futures positions opened prior to the entry into force of the general administrative act are excluded from the prohibition as well.
BaFin set an implementation period of three months in its general administrative act. The prohibition will therefore only enter into force on 1 January 2023.