The German financial regulator, BaFin, just published a set of guidelines on the provision of contracts for difference (CFDs). The watchdog is outlining that the purpose of the document is to guide brokers about the details related to their offerings to retail clients. After announcing its initial intent last December, the regulator implemented a ban on brokers who fail to protect their clients from negative balances.
Over the past couple of months since the implementation of a ban on the provision of CFDs without negative balance protection, the German regulator has been conducting reviews of broker offerings in the region.
As a result of its findings and to eliminate any prospective confusion, the document published today is designed to serve as a standard for brokers that are willing to operate in Germany.
Updated Terms and Conditions for All Retail Clients
The paper starts with the mention of a mandatory update to terms and conditions which brokers provide to its clients in Germany. The firms that offer CFDs to their clients have to explicitly point out that they are not liable for any additional payments related to a negative balance.
The German watchdog outlines that the terminology that has to be used is relatively varied: “Use of the term “additional payments obligation” is not the decisive factor. BaFin also considers the terms “deficit,” “shortfall,” “difference,” “negative balance” and any paraphrases to be indicative of an additional payments obligation if they oblige retail investors to settle a negative balance on their CFD account.
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Provided that a broker is offering different CFDs for retail and institutional investors, clients that are protected should be informed of the terms and conditions to which they agree.
Brokers are also not allowed to offer the option of a negative balance protection, they are obligated to provide only one type of CFDs to retail customers. Contradictory clauses on margin calls and different accounts should be explicitly omitted.
Marketing Obligations and More
Brokers have to adjust their marketing and risk-warning content to reflect that customers are protected from a negative balance. BaFin also notes that the provision of guaranteed stop loss orders does not prevent the possibility of a negative balance on the account.
Lastly, the BaFin elaborates: “The contractual preclusion of the additional payments obligation must apply unconditionally and in every instance. It is not permitted to make the preclusion of the extra payments obligation dependent on conditions such as a particular trading behavior on the part of the retail clients.”
As an example, the regulator highlights any clauses that include “improper behavior” by the client or any “insufficient margin” provisions.