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Screenshot of a breaking news alert e-mail from Q2 2017
Germany financial regulator BaFin has issued a new set of guidelines for brokers offering CFD trading to retail clients in the country.
LeapRate readers will recall that BaFin instituted its negative balance protection rule for all CFDs offered to retail traders in Germany effective this past August. However BaFin stated now that it still needed to address “contract constellations” which it identified as problematic during its latest review of CFD products which are being offered to German clients.
For example, BaFin reiterated that CFD providers are obliged to expressly and unconditionally exclude the additional payments obligation for retail investors in their terms and conditions. Use of the term “additional payments obligation” is not the decisive factor here. 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.
The guidelines set by BaFin, as indicated below, are intended to highlight those points which BaFin considers important for implementation of the provisions of the new rules.
The provisions of the contract play a decisive role in determining whether the provider is marketing, distributing or selling CFDs with or without an additional payments obligation. The supervisory requirements stipulated by the rules must therefore be implemented by the CFD providers in a manner that achieves legal certainty in the respective terms and conditions. They must do so by way of a contractual provision which expressly and unconditionally rules out the additional payments obligation for retail investors.
An additional payments obligation within the meaning of the aforementioned general administrative act describes an arrangement whereby, as a result of a CFD position being opened by the client with the provider, the client must pay a sum of money in excess of the funds available in their CFD account to the CFD provider. This also applies to payments requested by the provider before closing the position, for example within the context of margin calls.
Use of the term “additional payments obligation” in the terms and conditions is not decisive here. BaFin also considers the terms “deficit”, “shortfall”, “difference”, “negative balance” or any paraphrase to be indicative of an additional payments obligation if they lead to a situation where a retail investor is obliged to settle a negative balance on their CFD account.
The applicable terms and conditions relevant for CFD trading should be made permanently available to retail investors on the website of the CFD provider.
If the CFD broker offers different CFD trading accounts, for example one for professional clients and one for retail clients, it must be readily identifiable for the retail client at all times which terms and conditions apply to their account.
Retail clients may only be offered CFD trading accounts without an additional payments obligation. It is therefore insufficient to offer the retail investor the option of a CFD trading account without an additional payments obligation.
The terms and conditions should be comprehensible and coherent. Contradictory clauses, for example on margin calls or other kinds of accounts, which could lay down an additional payments obligation, are to be avoided.
If the provider uses several sets of terms and conditions for their CFD trading accounts, e.g. general trading conditions and specific terms and conditions for CFD trading, consistency must be ensured.
Similarly, risk warnings and advertising materials used by CFD providers and which could also become part of the contract are to be adapted in accordance with the provisions of the aforementioned general administrative act with a view to legal certainty and coherence.
In addition, contractual arrangements which, on the basis of the trading behaviour of the retail client, provide for a netting of the retail client’s claims against the CFD provider or other undertakings are not permitted if they go beyond the amount available in the client’s trading account and, in this sense, may constitute an additional payments obligation when looked at from an economic point of view.
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 additional payments obligation dependent on conditions such as particular trading behaviour on the part of the retail clients (e.g. no preclusion in the event of “improper behaviour” by the client or in the event of the client having an “insufficient margin”), on the discretion of the CFD provider or on a particular market situation.
Even if the CFD provider offers certain precautions in the trading algorithm, such as a guaranteed stop-loss order for instance, the possibility of an additional payments obligation for the client must be expressly ruled out in the contract.
BaFin said that it will examine the provisions of the general administrative act on an ongoing basis with due consideration of the above guidelines and, if necessary, enforce the provisions through administrative enforcement measures.
The full BaFin release on the CFD guidelines can be seen here.