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German regulator BaFin announces measures to protect CFD traders


Following hot on the heels of the FCA, the German Federal Financial Supervisory Authority (Bundesanstalt für FinanzdienstleistungsaufsichtBaFin) has announced its intention to limit the marketing, distribution and sale of financial contracts for difference (CFDs). Contracts with an additional payments obligation could then no longer be offered to retail clients.

“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”, says Chief Executive Director Elisabeth Roegele, explaining BaFin’s decision to intervene.

A European-wide clamp-down on the CFD industry began with the Cyprus regulator, CySEC, warning brokers about the bonuses they offer to their customers, while the FCA this week announced a host of measures designed to limit the amount of risk that inexperienced traders should be exposed to.

“BaFin is of the view that the risk of loss for the investor cannot be limited effectively through the margin call process or through stop-loss orders. Price fluctuations of an underlying market may be so significant within the shortest periods of time that the CFD provider will not have sufficient time to ask the investor for an additional payment on top of the margin they have deposited (margin call). In such instances, the investor’s position will be forcibly closed, sometimes resulting in very significant losses.”

BaFin state that “stop-loss orders aren’t a reliable way for investors to protect themselves from large losses. This is because the next available price at which such an order is normally executed may differ significantly from the price originally strived for. The difference to be paid by the investor can then amount to multiples of the margin they have put down.”

The German regulator is inviting comments on the proposal before its 20 January 2017 deadline.

A number of brokers have issued statements as a result of the announcement.

FTSE listed CFD provider, IG, responded to the announcement by commenting

“The Company considers the BaFin proposal to be consistent with IG’s recent introduction of Limited Risk Accounts, which guarantee that a client cannot incur losses in excess of the amount deposited in their account. IG firmly believes in robust and proportionate regulatory oversight of the CFD sector in all the markets in which it operates. The Company has operated and will continue to operate to the highest standards in the industry.”

Plus500 welcomed the news from BaFin, commenting that

“All accounts offered by Plus500 have always had negative balance protection. The Company therefore believes that any limitations imposed by BaFin in this respect will have no effect on its business,”

CMC  Markets pointed out that such a functionality 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.”

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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