Analysis: Germany’s Ultimatum to CFDs Brokers – Negative Balance No More

Negative balance protection is becoming a must even for STP brokers.

It’s been almost 2 years since the 15th of January 2015 when the Swiss National Bank derailed the foreign exchange markets. With the date of the anniversary nearing, the regulatory consequences of the event for the industry are starting to materialize.

This year will be marked with a drastic shift in the regulatory environment across the European Union. Foreign exchange and CFDs brokers have come under scrutiny after years of a relatively lax approach when compared to the US and Japan.

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The latest piece of regulatory news from the EU hit the wires yesterday. The German financial regulator BaFin has stated that the marketing and the distribution of CFDs products that are not protecting clients from negative balances will not be allowed.

some clients may need to be reclassified as professional investors in order to continue receiving STP access

Germany’s measure is probably the most effective one from the viewpoint of consumer protection. The measure is very clear – brokers that are willing to provide their services in the country can do so, as long as they protect clients from negative balances.

The interests of all consumers remain untouched – they can choose how much leverage they want to use and they get insurance.

Complications, complications

The industry has already taken some measures in terms of negative balance protection. All publicly traded CFDs providers have issued statements in agreement with the BaFin’s decision.

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Following announcements from IG Group and Plus500, today CMC Markets outlined: “The BaFin consultation paper requires CFD providers to ensure that retail clients cannot lose more money than is deposited in their account, a functionality which is already available to CMC Markets clients in Germany.”

“On the basis of the consultation paper, there are no other requirements from BaFin including no leverage limits, and where retail clients’ risk is limited to their deposits, there is no prohibition on marketing, distribution and sale of CFDs. We welcome this balanced approach from BaFin and will respond to the consultation in accordance with the proposed timeline of 20 January 2017,” the statement concludes.

In a surprise turn of events, Germany is becoming a sort of a safe heaven for European retail investors – they are protected from negative balances and are using as much leverage as they like.

An unforeseen consequence of the regulatory action by the German regulator may be a change in sentiment towards the country from straight-through processing (STP) or direct market access (DMA) providers. When a trader takes a risky bet using leverage from the brokerage, he should be liable for the risks if the trade goes south. In any case, brokers will have to implement additional measures to warrant that their clients can’t go into negative territory (especially STP/DMA providers).

This can result in some changes for high net worth clients from Germany – they may need to be reclassified as professional investors in order to continue receiving STP access to the market without the negative balance protection.

A problem could arise for STP brokerages that are handling substantial volumes and consequently are handling certain risks for their clients. How will they be able to provide their services to German retail clients?

This and many other questions will soon be answered by the regulators. In the meantime, German traders and brokerages that are operating in the country can submit their comments to the BaFin. Comments on the draft may be submitted in writing until the 20th of January 2017.

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