CFDs are under supervisory scrutiny since 2016. BaFin announced in summer 2016 that it would look into the risks associated with CFDs to retail investors. In December 2016, BaFin published a draft general administration act establishing the grounds for the now enacted restrictions.
The restrictions on CFD trading constitutes a precedent in making use of the product intervention powers by BaFin. These product intervention powers have been introduced into German law in July 2016 in anticipation of the intervention powers granted under the Markets in Financial Instruments Regulation (MiFIR) applicable from 03 January 2018. In July 2016, the European Securities and Markets Authority (ESMA) simultaneously issued a warning on sale of speculative products such as CFDs to retail investors.
The BaFin restrictions on CFDs and the ESMA warning should be read in light of the new requirements under the Markets in Financial Instruments Directive (MiFID 2) and MiFIR applying with the beginning of 2018. Under the MiFID 2/MiFIR regime, ESMA and the European Banking Authority will have product intervention powers similar to the intervention powers of the national competent authorities.
The general administrative act prohibits the marketing, distribution and sale of CFDs that may require retail investors to additional payment obligations (Nachschusspflicht).
The prohibition applies to German firms, German branches of foreign firms and foreign firms that market, distribute or sell CFDs to retail clients in Germany. Retail clients wishing to continue investing in leverage CFDs with additional payment obligations could upgrade to the status of a professional client. The upgrade requires them to show that they have necessary experience, knowledge and expertise and are capable of adequately assessing the risks involved with CFDs.
CFD providers must implement these restrictions by 10 August 2017. They, however, can challenge the administrative order until 09 June 2017 by submitting an objection to BaFin and obtaining an injunction of the administrative court reinstating the suspensive effect of the objection. From 03 January 2018, the product intervention powers under MiFIR apply. Regulation on CFDs and product intervention measures might be further unified on European level.
The BaFin retrictions on CFD trading for retail clients indicate further supervisory action in relation to complex financial instruments. With regard to the European wide intervention powers under MiFID 2/MiFIR, it is to be expected that further unifying acts will follow and other retail products deemed to be speculative could be subject to these intervention powers.
BaFin General Administrative Act regarding CFDs
ESMA Warning about CFDs
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