Germany regulator BaFin requiring negative balance protection for CFD trading

Germany's BaFin maintains restrictions on retail trading with financial CFDs

Germany’s financial regulator Bundesanstalt für Finanzdienstleistungsaufsicht (or just ‘BaFin’) has announced new regulations governing leveraged CFD trading.

BaFin’s actions come just two days after UK regulator the FCA dropped a bombshell by proposing new rules limiting leverage on Forex and CFDs to 50x, and banning bonus payment inducements to retail traders. The FCA’s actions sent the shares of publicly traded online brokers down by 25-40%, including those of CMC Markets Plc (LON:CMCX), IG Group Holdings plc (LON:IGG), and Plus500 Ltd (LON:PLUS) – three of the leading CFD brokers in the UK.

BaFin’s proposals, however, are much milder.

The main thrust of BaFin’s rule changes is to limit the losses on leveraged CFD trading to the amount of equity already deposited by the client. No other mention of leverage limits, or bonus payments, was made.

BaFin’s proposal effectively requires CFD brokers to provide negative balance protection to their trading clients. In practice, that is something which many online brokers already do.

In fact, in speaking with several leading brokers LeapRate has learned that most FX industry executives are positively surprised by the BaFin proposals, as many were expecting much worse – such as action the FCA took, or even a total ban on Forex and CFD advertising (as Holland and France did), or a total ban on trading leveraged off-exchange instruments, put in place recently in Belgium.

According to BaFin, the risk of loss for the investor cannot be limited effectively through the margin call process or through stop-loss orders. This is because the next available price at which such an order is normally executed may differ significantly from the price originally strived for – that is, the risk of a ‘price spike’. The difference to be paid by the investor can then amount to multiples of the margin they have put down.

The BaFin proposals are open for comment from CFD industry participants and traders until January 20, 2017.

More on BaFin’s CFD rule proposals can be seen on the regulator’s website here.

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