The German financial regulator, BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) or the German Federal Financial Supervisory Authority, has taken a step to limit CFDs advertisement in the country.
The news comes only days after the UK Financial Conduct Authority introduced revisions that could substantially affect the retail market in the UK. BaFin’s intent is to limit the marketing, distribution and sale of financial contracts for difference (CFDs). In addition the regulator is going after negative balance risks and is therefore mandating that no CFDs with an additional payments obligation can be offered to retail clients.
The German watchdog is stating that concerns about investor protection are at the core of its actions and that brokers can not expect additional payments obligations to be covered by retail clients.
Commenting on the news, the Chief Executive Director of BaFin, Elisabeth Roegele, stated: ”In the case of CFDs with an additional payments obligation, the risk of loss for the investor is incalculable. For consumer protection reasons, we cannot accept that.”
The limitations are applying only if a broker is not providing a negative balance protection. In a statement, IG Group elaborated that the intended measure issued by BaFin can only be undertaken if the client is not at risk of losing more than the value of their account.
The brokerage explains in a statement that such a policy is consistent with the introduction by the company of Limited Risk Accounts, where clients cannot incur losses in excess of the amount that is deposited in their account.
“IG will carefully consider the full implications of the BaFin announcement and will be seeking to meet with BaFin before responding to the consultation, in accordance with the timeline provided of 20 January 2017,” the statement reads.
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Negative Balance Protection and the SNB
According to the regulator, the risks of negative balance cannot be mitigated by the use of stop losses and/or a margin call that is issued by the brokers. Force closing an investor’s position can result in substantial losses as we have seen in the cases of the SNB and the GBP flash crash recently.
The issues arising from execution at the next available price, which can be substantially different from the intended stop loss order’s value, is greatly increasing the risks for traders, the official statement by the German regulator reads.
With financial contracts for difference, investors speculate on the performance of underlying instruments such as indices, shares, commodities, currency pairs or interest rates.
Compared to a direct investment, the capital invested is small. Positive and negative price changes are mirrored by the CFD.
Once again the Swiss National Bank black swan is at the heart of a regulatory decision that is reshaping the market.
“Such products came to the public’s attention primarily as a result of the “Swiss franc shock” at the beginning of 2015, when the Swiss National Bank abandoned the cap on the Swiss franc’s value against the euro and many CFD investors suffered major losses as a result of having to subsequently make additional payments,” the official announcement from the BaFin reads.
The regulator has published the planned General Administrative Act on its website and is welcoming comments from brokers and traders alike. The can be submitted writing until the 20th of January 2017.