After preparing for the expiry of the product intervention measure imposed by the European Securities and Markets Authority (ESMA) with regard to binary options, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) is now doing the same regarding contracts for difference (CFDs). BaFin plans to renew the restriction on the marketing, distribution and sale of CFDs to retail clients in Germany.
It has today published a draft general administrative act (only available in German) for this purpose. This is intended to maintain the existing prohibition of additional payments obligations for retail investors in Germany. Such a prohibition was first imposed by BaFin in May 2017 and subsequently also by ESMA for the whole of the European Union on a temporary basis from August 2018. The product intervention measure by ESMA includes maximum permissible leverage, a negative balance protection, a margin close out rule, a restriction on the incentives offered to trade CFDs and standardised clear risk warnings. BaFin is also including these protective measures for retail investors in its planned general administrative act.
With this, BaFin will permanently match the level of protection in Germany to the temporary product intervention measure issued by ESMA. This is intended to prevent attempts to evade these measures by providers from other EU countries. Furthermore, in taking this step, BaFin is once again addressing the significant investor protection concerns expressed at the time of the initial prohibition regarding CFDs. BaFinconsiders in particular contracts for difference with additional payments obligations to carry an incalculable risk of loss for retail investors. The same applies for CFDs without leverage limits or negative balance protection. BaFin also considers the often insufficient advice concerning risks given in relation to these products to be problematic. From BaFin’s perspective, retail investors should not be distracted from the high risks associated with CFDs by initial credit, discounts, bonuses or other incentives. For the same reason, BaFin also considers a standardised risk warning of the high probability of loss to be indispensable.
BaFin has published the planned general administrative act on its website. Comments on the draft may be submitted in writing until 10 January 2019.
Definition Contracts for difference (CFDs)
With financial contracts for difference, investors speculate on the performance of underlying instruments. Underlying instruments include indices, shares, commodities, currency pairs or interest rates. Compared to a direct investment, the investor’s capital investment is small. The investor speculates on positive or negative price changes for the underlying. When the price of the underlying changes, the corresponding price gains or losses are mirrored by the CFD. If the difference is positive, the investor is paid the difference amount by the CFD provider; if the difference is negative, it is the investor who must pay the difference. The key characteristic of CFDs is their leverage, which means that investors are subject to risks that correspond to a higher transaction volume than the capital they acutally invested.