Leveraged trading involves high risk, but can you lose more than what you invest? The new German BaFin CFD trading negative balance protection is here to protect investors.
14 August, Forex industry news - German Federal Financial Supervisory Authority, Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), has put new CFD negative balance protection requirement which goes into practice from August 10. The latest update will bring a number of changes for those trading and offering CFDs in Germany. You can learn more about the BaFin CFD trading requirement restrictions and its consequences which AtoZForex published on the 9th of May 2017.
German BaFin CFD trading negative balance protection
Entities offering CFDs received their German BaFin CFD trading negative balance protection for the first time on December 8, 2016. Almost simultaneously, the UK's Financial Conduct Authority (FCA) issued a set of regulations for CFD brokers in the UK.
Since December, brokers targeting the high volume German market has been rather distressed, making changes and getting compliant. BaFin is not an easygoing regulator. Everyone knows that not like some of the other Regulators, BaFIN would take strict actions. Thus, brokers and LPs have been attentively following the latest developments.
One of the main issues brokers expected was possible stricter commandments like maximum leverage cap – similar to the one from FCA UK. Some industry analysts also expected to see a possible ban on leveraged trading and advertising of leveraged products, like in Belgium.
The speculations continued until May 8. Then it was officially announced that the original set of rules would be coming into force on the 10th of August. Meanwhile, BaFIN's Executive Director Elisabeth Roegele commented the following:
“By restricting trading in CFDs we are making use for the first time of the product intervention option.”
She then continued that:
"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."
As BaFIN Executive commented the application is to protect traders. Negative balance protection aims to secure investors from excessive losses. But once "brakes" are in force, such as Margin Call or Stop Loss, the consumers cannot give up more than a particular amount. This limits the exposure for both clients and brokers. Especially, those who are new in the CFD business this would also hopefully become the end of the traditional "zero-sum game".
What are CFDs?
Of course most of AtoZForex readers are Forex traders and Forex Brokers. However, some 22.7% of our readers are in the Forex market with less than 12 months of experience according to our latest survey among 1000 traders.
To make it clear for those of new traders, we should also explain what CFDs are. CFD stand for Contract For Differences. CFD is a contract between two parties – buyer and seller – speculating on a price of underlying (shares, currency pairs, indices or interest rates). The investor bets on a change in price, whether positive or negative. When the change in price takes place, it is reflected on CFD. Correspondingly, the investor either gains or bears a loss. The procedure is not so complex in itself, but there is one highly controversial aspect about CFD - RISK.
Of course, by means of compliance requirement every regulated entity must have a risk disclaimer. You have seen it everywhere, "Trading on leverage carries a high level of risk". However, often you don't know that the risk of loss is not limited at least in a true STP environment. Unlimited risk option makes trading on leverage highly dangerous game for the ones with no risk management experience. The investor may suffer losses tenfold larger than margin payments. That’s what makes CFD subject to increased attention from the side of financial regulators worldwide.
Meanwhile, it is not just the trader, but also the Broker subject to massive losses if they don't control their risks. Indeed, the SNB black swan event toppling down the former market leader FXCM is a great yet very unfortunate example of it.
That’s what makes CFD subject to increased attention from the side of financial regulators worldwide.
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