The following article was written by Jens Chrzanowski, Regional German Director at FCA regulated broker Admiral Markets UK.
It’s no secret, Germany is one of the largest and most important markets for Forex & CFD trading. It’s now also known affectionately by myself as the “land of the free”. Why so? Let me explain…
BaFin, the German financial regulator, is now one of a number of European regulators to have made clear their final decision regarding tougher regulation, making their announcement earlier this week. The French regulator managed to do so a few weeks ago already, so too have their Spanish, Cypriot and Belgian counterparts. Each regulator appears to apply their single, unique viewpoint in terms of the appropriate level of regulation that they feel should be administered. I wonder which country will be next?
The decision by BaFin states that a 100% negative balance protection policy, without any restrictions or limitations on traders, is obligatory. If a broker fails to implement such terms to their service, they can no longer offer CFD trading to their German clients. Just to point out, usually most “Forex” brokers are, by law and terms, CFD brokers – take a look at their terms if you’re not sure. So in this case, it’s the same for currency pair trading and CFDs.
This negative balance protection decision should be seen as a move to provide greater consumer protection. There were many complaints following the Swiss Franc disaster in 2015 – the Black Swan event in which some traders lost a lot of money and even came to negative balances. Effectively, this move by BaFin is the regulator’s reaction to that event. Leveraged trading with big opportunities and big risks is okay, but negative balances, which can be incalculable at times, will be history after late summer 2017 in Germany.
Brokers have three months to implement these changes and, once in place (by August 2017), we’ll see a higher level of consumer protection. But on the other hand, we’ve seen nothing that some other European regulators request, i.e. no limitation on available leverage, no restriction on bonus promotion, no ban on CFD advertising, etc.
If Germany wants to take Britain’s pole position as the next European financial centre, with Brexit potentially heavily tarnishing London’s reputation, this step is extremely smart. The French regulator’s policy is much more strict and even the Cypriots have gone further with their bans on services and promotions.
So, why has the German regulator acted this way? Well, there are many possible reasons, one of them I’ve named already: the attempt to establish pole position in Europe. One other reason is the large market of leveraged products in Germany. For decades, many private clients have held trade warrants and leveraged certificates and also the Eurex stock exchange is well known and established via online brokerage access.
If you compare warrants and other leveraged products to CFDs, the only big difference is that CFDs are an OTC product, while the others can be traded via an exchange.
Years ago, German online brokers also established OTC trading for their retail clients, directly with the bank or company that offers these warrants and certificates, so there’s also a high trading volume here. If you do a fair comparison, there’s actually not that much difference between the two. The optional negative balances for CFDs were one other difference, but not for much longer!
Admiral Markets UK Ltd welcomes this new level of regulation and we share the same view as BaFin. Consumer protection is great, as long as it’s wisely implemented and fair for all parties. All brokers point out the big risks of trading, through placing numerous risk warnings on their sites. Excellent! But also here, we need to see see both sides: where there are big risks, there are also big opportunities and the possibility to make large profits.
Let traders be free and allow them to decide what to trade, how to trade it and with which degree of leverage. In my view, Germany, the “land of the free”, has done so, thanks to this wise and fair regulation. Bravo!
See you next week!
Do you have feedback, concerns, requests, maybe even compliments? I’d love to hear. Please contact me via: [email protected].
Trading on margin carries a high level of risk, and this article should not be seen as advice or solicitation to buy or sell. It’s written for informational purposes only.