The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin)  has organized a public hearing to discuss the limitation of 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 is to be implemented within three months of the date on which the General Administrative Act is deemed to be operative.

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.

According to BaFin the level of the retail investor’s risk of loss cannot be limited by stop-loss orders. If the retail investor places a stop-loss order with the CFD provider to limit its 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. In addition, the price of the underlying may fluctuate so much within a short period of time that the “next available” price can radically increase the difference to be paid by the retail investor multiplying the capital they originally invested.

BaFin bases the intended prohibition of the marketing, distribution and sale of the credit-linked notes on section 4b (1) no. 1 in conjunction with section 2 no. 1a 1st alternative of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG). BaFin holds that the distribution, marketing and sale of credit-linked notes as defined above to retail clients raises significant investor protection concerns because they are (i) highly complex products, (ii) have a misleading product name and description, (iii) are part of a market dominated by sophisticated parties and (iv) there is an inherent risk of conflict.

Market participants have until 20 January 2017 to comment on the proposed administrative act by BaFin.