This translation is furnished for information purposes only. The original German text is binding in all respects.

Dear Sir or Madam,

The General Administrative Act of 8 May 2017 (ref. no.: VBS 7-Wp 5427-2016/0017) is hereby replaced by the following

General Administrative Act:

1. I order a ban on the marketing, distribution and sale of financial contracts for difference (hereinafter “CFDs”) to retail clients as defined in Article 4(1)(11) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on mar-kets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (hereinafter MiFID II). For the purposes of the General Administrative Act, CFDs include rolling spot forex products and financial spread bets.
2. The ban in 1. above does not apply to CFDs that meet all of the criteria cited in a), b), c), d) and e):
   a) CFDs with required initial margin protection for retail clients. Here, “initial margin” means any and all payments by retail clients for a CFD, excluding commissions, transaction fees and other costs linked to its conclusion. The amount retail clients must pay to guarantee initial margin protection is determined as follows:
   aa) 3.33% of the notional value of the CFD when the underlying currency pair is composed of any 2 of the following currencies: US dollar, Euro, Japanese yen, Pound sterling, Canadian dollar or Swiss franc;
   bb) 5% of the notional value of the CFD if the index, currency pair or commodity of the underlying is:
   (1) any of the following equity indices: Financial Times Stock Exchange 100 (FTSE 100); Cotation Assistée en Continu 40 (CAC 40); Deutsche Börse AG Deutscher Aktienindex 30 (DAX30); Dow Jones Industrial Average (DJIA); Standard & Poors 500 (S&P 500); National Association of Securities Dealers Automated Quotations Composite Index (NASDAQ), NASDAQ 100 Index (NASDAQ 100); Nikkei Index (Nikkei 225); Standard & Poors/Australian Securities Exchange 200 (ASX 200); EURO STOXX 50 Index (EURO STOXX 50);
   (2) a currency pair composed of at least 1 currency that is not listed in 2. (a) (aa) above; or
   (3) Gold;
   cc) 10% of the notional value of the CFD when the underlying commodity or equity index is a commodity or any equity index other than those listed in 2. (a) (bb) above;
   dd) 50% of the notional value of the CFD when the underlying is a cryptocurrency; or
   ee) 20% of the notional value of the CFD when the underlying is:
   (1) a share; or
   (2) not otherwise listed in (2) (a).
   b) CFDs with required margin closeout protection for retail clients. Here, “margin closeout protection” means the closure of one or more of a retail client’s open CFDs on terms most favourable to the client in accordance with Articles 24 and 27 of MiFID II, and under German law with sections 63-64, 70 and 82 of the German Securities Trading Act (Wertpapierhandelsgesetz, hereinafter the “WpHG”), when the sum of funds in the CFD trading account and the unrealised net profits of all open CFDs connected to that account falls to less than half of the total protective initial margin required for all those open CFDs.
   c) CFDs with required negative balance protection for retail clients. For the purposes of this General Administrative Act, “negative balance protection” means the upper limit of a retail client’s aggregate liability for all CFDs connected to a CFD trading account with a CFD provider, and the funds in that CFD trading account.
   d) CFDs for which the CFD provider does not directly or indirectly provide the retail client with a payment, or monetary or non-monetary benefit in relation to the marketing, distribution or sale of a CFD, other than the realised profits on any CFD provided and other than informational and research instruments pertaining to CFDs; and
   e) CFDs for which the CFD provider sends no direct or indirect communications relating to the marketing, distribution or sale of the CFD to retail clients, and publishes no such information so as to make it accessible to retail clients, unless such communications or information include the appropriate risk warning specified in the Annex to this General Administrative Act.
3. The ban becomes effective upon the expiry of Decision (EU) 2018/796 of 22 May 2018, as updated by Decision (EU) 2018/1636 of 23 October 2018, Decision (EU) 2019/155 of 23 January 2019, and Decision (EU) 2019/679 of 17 April 2019.
4. This General Administrative Act shall be deemed announced on the day following the public announcement.

A. Condition

I. Background information about CFDs

Financial contracts for difference are arrangements between 2 parties who speculate on the price performance of a given underlying asset. CFDs are used for short-term speculation and are currently only traded over the counter. They are leveraged contracts characterised by an unlimited risk of loss for the investor.

CFDs enable investors to use a relatively small capital investment to speculate on the performance of currency pairs, shares, indices, commodities, bonds and other underlying assets without having to invest directly in the underlying asset. In a CFD transaction, therefore, no underlying assets are ever purchased or traded by the investor. For example, in opening a share CFD position, the investor never partici-pates directly in financing a company through the capital market.

In CFDs, the contractual partners agree to settle the difference between the price of an underlying asset at 2 different points in time (t and t+n). The result of the speculation is calculated as the difference between the opening and closing price of the underlying asset. For example, if an investor speculates on the price of a share going up, a CFD provider, who acts as the contractual party in this CFD and does not hedge against market risk¹, speculates on the price of the share going down. When the price of the underlying asset changes, the corresponding price gains or losses are mirrored by the CFD. If the difference is positive, the CFD provider pays the amount of the difference to the investor; if, however, the difference is negative, it is the investor who must pay the difference to the CFD provider.

Example²:
The investor opens a CFD position in order to speculate on the performance of the price of Share A. The CFD position is 4,000 Shares A at EUR 10 each, totalling EUR 40,000. The CFD provider offers the investor a leverage of 20. This means that the margin required for the entire position is EUR 2,000 (or 5% of the entire position). The effects of the changes in value of the underlying asset on the profit/loss from the CFD are as follows:

Share A price	Share A price performance	Profit/loss from the A CFD	A CFD price performance
EUR 7.50	-25 %	EUR -10,000	-500 %
EUR 9.50	-5 %	EUR - 2,000	-100 %
EUR 9.90	-1 %	EUR - 400	-20 %
EUR 10.00	0 %	EUR 0	0 %
EUR 10.10	1 %	EUR 400	20 %
EUR 10.50	5 %	EUR 2,000	100 %
EUR 12.50	25 %	EUR 10,000	500 %

The price of the underlying asset when opening the CFD position (opening price) and when closing the CFD position (closing price) determines the amount of the difference due. The opening and closing of a CFD position is based on prices set by the CFD provider. The investor thus speculates on the performance of prices that are determined and set by the CFD provider. These prices may generally mirror the available market prices, such as stock market prices or underlying asset prices available on reference markets. However, CFD providers have scope for discretion in determining the price difference that is contractually due and may therefore set the relevant price at their own discretion in compliance with the opening terms agreed with the investor, e.g. in the event of particularly high volatility of the underlying asset or in the case of market turbulence.

In addition, a phenomenon called “price gap” frequently occurs when the price is determined by the CFD provider. A price gap occurs when the price of the underlying asset as determined by the CFD provider for the investor abruptly “jumps” to a different level. Such price jumps may follow the publication of economic data or significant economic events that lead to major price fluctuation of the underlying asset. If a price gap occurs when the price of the underlying asset develops in a way that is unfavourable to the investor, they may not always have the opportunity to close their open CFD position between the 2 price levels in order to minimise their losses. Instead, they are only able to close their CFD position at the next price as determined by the provider. This price, though, may differ significantly from the previous one.

The key characteristic of CFDs is their leverage. If an investor opens a CFD position, they do not need to have enough balance on their trading account with the CFD provider to equal the current price of the underlying asset of the CFD position. Rather, CFD providers only require investors to put down a small fraction of the price of the underlying asset on their trading account (this amount is known as a “margin”, and is described under (2)(a) above as the “initial margin”). The investor can thus speculate with a larger amount (mathematical value of the corresponding position in underlyings) than they have actually put down as margin. The mathematical value of the corresponding position in underlyings can even exceed the value of the investor's total existing assets. Such an arrangement enables the investor to participate in the price changes of the underlying asset (both upwards and downwards) to a disproportionate extent. For every open CFD position, the investor must put down a margin that is calculated as a percentage of the price of the underlying asset. If the margin on an underlying asset is 1%, for example, the investor can open a CFD position whose underlying asset may be worth 100 times more than the margin. The margin amount is determined in detail for every underlying asset by the CFD provider. Since the value of the underlying asset varies depending on its price performance, the amount to be maintained as margin on the CFD account does not remain constant but instead fluctuates in line with the price performance of the underlying asset. If, as a result of the price performance of the underlying asset, the amount paid into the trading account is utilised in full by the amount to be maintained as margin, the investor can deposit more money on their trading account; otherwise, the CFD position will be forcibly closed by the provider.

The investor therefore does not have to have the entire contract amount on their CFD account when opening a CFD position. Instead, the CFD provider will often allow the investor to put down only a fraction of this amount. In this way, the investor’s willingness to speculate is purposefully encouraged.

The amount of the margin held for the CFD position in a certain underlying asset plays a key role in determining how high the leverage is with which the investor can participate in the price developments of the underlying asset. The lower the margin that the investor has on their CFD account as compared with the value of the underlying asset, the higher the leverage. The smaller the fraction of the underlying asset held as margin, the higher impact both positive and negative price changes of the underlying asset of the CFD have as compared with the investor’s margin.

If the price of the underlying asset of a CFD shows significant fluctuation within short periods of time (high volatility) and if the CFD provider requires a minimum margin for that underlying asset that is similar to the fluctuation range of the underlying asset, the investor has the opportunity to quickly multiply the margin. The drawback of leverage, however, is that there is a corresponding risk of the investor’s losses reaching levels many times the amount of the margin. If, for instance, the price moves significantly in a direction that is unfavourable to the investor, the difference between the opening and closing price they have to pay may be many times the amount they have as margin on their account. If the margin held on the investor’s CFD trading account is insufficient to pay for the losses incurred, the investor must pay for the losses using their other assets (obligation to make additional payments).

It must be noted that the leverage described produces a particular scaling impact in connection with the potential extent of the obligation to make additional payments. This is because the leverage increases the potential loss in proportion to the margin put down. In certain cases, this loss can exceed the margin held on the investor’s trading account. The higher the CFD’s leverage, the higher the potential loss and the higher the probability that the margin held on the investor’s trading account will not be sufficient to pay for the losses incurred, which means that the client will be obliged to make additional payments.

Example:
If the price of Share A from the example above decreases from EUR 10 to EUR 7.50, the investor who put down EUR 2,000 as margin loses EUR 10,000. With a greater number of contracts traded, the potential extent of any loss also increases. If the investor has no more balance than the amount of the margin on their CFD account (total capital on the account minus margin), they then have to pay the remaining difference of EUR 8,000 using their other assets. The CFD provider would then prompt the investor to make an additional payment without delay.

In principle, CFDs have no length limit, but this only applies as long as the investor fulfils the minimum margin requirements set by the individual CFD provider. If the investor’s balance (margin plus freely available capital on the CFD account) is no longer sufficient to fulfil the margin requirements set by the CFD provider, the latter will issue a margin call. Depending on the provider, such margin calls may reach different escalation steps and involve, for instance, notifying the investor when a certain threshold has been exceeded (e.g. loss of 80% of balance). If the investor’s balance is no longer sufficient to fulfil the CFD provider’s margin requirements, the CFD position is automatically closed. However, such forced closure does not guarantee that the investor’s losses will be limited to their balance with the CFD provider. Instead, abrupt price fluctuations of the underlying asset or the price gaps may result in the investor’s losses amounting to multiples of their initial margin payment. These losses must then be paid for using the investor’s other assets.

A CFD position is typically closed by investors on the same day that it is opened. If CFD positions are kept open overnight, however, the investor is usually charged an overnight fee. The short-term character of trading also manifests itself in the design of the CFD providers' trading platforms. These platforms typically include a whole range of visual signals, the intention of which is to depict the relevant price developments for the investor. These indicators are intended to support investors when estimating price developments. The flashing price information and visual effects indicating possible price developments could encourage the investor to open CFD positions.

II. Dissemination of CFDs

CFDs are generally marketed, distributed and sold digitally, on online platforms and apps. The number of investors investing in CFDs difficult to determine due to the often relatively short lifespan of CFD accounts and the cross-border aspect of trading. According to data it obtained from a range of competent authorities at the national level, the European Securities and Markets Authority (hereinafter “ESMA”) estimated that the number of retail client trading accounts³ from EEA-based CFD and binary option providers had increased from 1.5 million in 2015 to approximately 2.2 million in 2017⁴.

In the first quarter of 2017, there were 176,393 client CFD accounts according to statistics on the German market and clients headquartered in Germany produced in June 2017 by the Research Center For Financial Services on behalf of the Contracts for Difference Verband e. V.⁵. By the first quarter of 2018, this number had increased by 11.5% to 196,757 client CFD accounts according to May 2018 statistics, which were also produced by the Research Center For Financial Services on behalf of the Contracts for Difference Verband e. V., for the German market and clients headquartered in Germany⁶.

BaFin’s observations and studies carried out by other European supervisory authorities⁷ show that the average amount of time spent as a client of a CFD provider is rather short. In that time, as observed by BaFin and other European supervisory authorities, the majority of investors lose the money they have invested. These prudential observations have also been confirmed by various studies conducted by European supervisory authorities⁸.

III. Restriction of the marketing, distribution and sale of CFDs to retail clients by BaFin by means of the General Administrative Act of 8 May 2017

Due to the unlimited risks of loss of CFDs and the unlimited additional payments obligations that result for the investor, BaFin prohibited the marketing, distribution and sale of CFDs with an additional payments obligation to retail clients by means of the General Administrative Act of 8 May 2017, in accordance with section 31a (3) of the WpHG in the version in force until 2 January 2018 (corresponds to section 67 (3) of the current version of the WpHG)⁹.

The General Administrative Act of 8 May 2017 was based on BaFin’s observation that CFD providers target retail clients almost exclusively.

IV. Restriction of the marketing, distribution and sale of CFDs to retail clients in the European Union by ESMA

ESMA Decision (EU) 2018/796 of 22 May 2018 ordered a (temporary) restriction on the marketing, distribution and sale of CFDs to retail clients throughout the EU in accordance with Article 40 of MiFIR¹⁰. In this ESMA Decision, a retail client is equivalent to a Privatkunde in BaFin’s General Administrative Act of 8 May 2017, as it is defined for the purposes of section 67 (3) of the WpHG. The ESMA Decision served to prohibit the marketing, distribution and sale of CFDs with an additional payments obligation to retail clients (to the extent already done by BaFin’s General Administrative Act of 8 May 2017). Pursuant to Article 2(c) of the measure by ESMA, the marketing, distribution and sale of CFDs to retail clients (irrespective of the other criteria listed in Article 2) are only permissible if the CFD provider provides what is known as “negative balance protection”. In terms of legal effect, then, the requirement to provide negative balance protection in the ESMA Decision is equivalent to the prohibition of any obligation to make additional payments in the BaFin General Administrative Act of 8 May 2017.

ESMA also ordered other restrictions on the marketing, distribution and sale of CFDs to retail clients, particularly leverage limits. The ESMA Decision came into force on 1 August 2018 for a period of three months, until 31 October 2018. With Decision (EU) 2018/1636 of 23 October 2018, ESMA passed a resolution to extend this restriction with minor alterations, effective as of 1 November 2018 for a period of an additional three months, until 31 January 2018¹¹. ESMA Decision (EU) 2019/155 of 23 January 2019 adopted a further renewal of the restriction of the previous renewal, ESMA Decision (EU) 2018/1636 of 23 October 2018¹². This Decision came into force on 1 February 2019 for a period of three months, until 30 April 2019. A new ESMA Decision (EU) 2019/679 of 17 April 2019 adopted a further renewal¹³. This restriction came into force on 1 May 2019 for another period of three months, until 31 July 2019. At the time of issuance of this General Administrative Act on 23 July 2019, ESMA has not adopted any further renewal. Providing ESMA has not adopted a further renewal by 31 July 2019, ESMA Decision (EU) 2019/679 will expire on 31 July 2019 pursuant to the terms of this Decision, and this General Administrative Act will become effective on 1 August 2019.

The restriction of the marketing, distribution and sale of CFDs to retail clients by ESMA is equivalent in scope and content to that described in this General Administrative Act.

One of ESMA’s justifications for its Decision of 22 May 2018 was that a large number of national competent authorities besides BaFin have reported concerns to ESMA about the widening distribution of CFDs to a mass retail market, despite these products being complex and inappropriate for the large majority of retail clients. On the basis of information provided by a number of other national competent authorities, ESMA also identified an increase in the levels of leverage being offered in such products to retail clients and in the levels of client losses arising from investing in these products¹⁴. These concerns were amplified by often aggressive marketing techniques and inappropriate practices from providers marketing, distributing or selling CFDs, such as the offering of payments, monetary or non-monetary benefits or through inappropriate disclosures of risks.

V. Overlap of the BaFin General Administrative Act of 8 May 2017 and the ESMA Decision

With the entry into force of the ESMA Decision on 1 August 2018 and in accordance with Art. 40(7) of MiFIR, the BaFin General Administrative Act of 8 May 2017 became secondary to the ESMA Decision, which, like the BaFin General Administrative Act, prohibits the marketing, distribution and sale of CFDs with an additional payments obligation to retail clients.

VI. Other legislative and/or supervisory and/or other official measures in the EU

The national competent authorities of other EU countries as well as other institutions like the European Banking Authority (hereinafter the “EBA”) had had concerns about investor protection with regard to CFDs even before the adoption of ESMA Decision (EU) 2018/796 of 22 May 2018. Since 2013, these concerns have led ESMA and many EU countries to consult and implement legislative and/or supervisory measures intended to prohibit or restrict the marketing, distribution and sale of CFDs to retail clients, or at least to warn retail clients about the risks involved. In the EU, the following measures have been adopted and steps taken:

1. In an investor warning¹⁵ issued on 28 February 2013, ESMA and the EBA warned that purchasing CFDs could result in losses significantly exceeding initial investment.
   
2. In Poland, a ban on the execution of client orders regarding margin-based financial instruments, including CFDs, was issued on 5 December 2014. This ban applied as soon as the margin put down by the client fell below the threshold of 1% of the notional value of the financial instrument. Then, in July of 2015, the national competent authority in Poland, KNF, (hereinafter the “PL-KNF”) introduced a leverage limit as a result of the ban, thereby prohibiting the sale of CFDs with leverage above 100:1 to retail clients.
3. On 25 July 2016, ESMA published another warning on CFDs and other speculative products¹⁶. In it, ESMA again warned investors against major risks resulting from CFD leverage, for example. ESMA pointed out that the providers in their advertising often presented an unbalanced picture of the opportunities and risks of these products. Moreover, ESMA remarked in the warning that the commercial interests of providers of CFDs and the other aforementioned products often conflicted with the interests of investors. According to ESMA, these conflicts of interest were particularly apparent in business models of the providers whose profits directly correlate with the investors’ losses.
4. Since August 2016, the national competent authority in Belgium – the Financial Services and Markets Authority (hereinafter the “BE-FSMA”) – has prohibited the distribution to retail clients of certain derivative contracts (including CFDs) that are traded over the counter, and are not included in trading on the regulated market or multilateral trading facilities. In addition, the BE-FSMA has forbidden a number of aggressive or inappropriate distribution techniques such as cold calling via external call centres, inappropriate forms of remuneration and fictitious gifts or bonuses¹⁷.
5. Since November 2016, the national competent authority in Cyprus – the Securities and Exchange Commission (hereinafter “CY-CySEC”) – has required CFD providers to establish a leverage policy and apply leverage limits not exceeding 50:1 for retail clients, unless a client, with the relevant knowledge and experience, requires a higher level of leverage¹⁸. CY-CySEC also required providers to have a negative balance protection per CFD account.
6. In December 2016, France adopted legislation that prohibits securities service providers from sending individuals marketing communications regarding CFDs that do not limit the client’s loss per position¹⁹.
7. On 6 December 2016, the national competent authority in the UK – the Financial Conduct Authority (hereinafter the “UK-FCA”) – published a consultation paper containing a package of measures with regard to CFDs²⁰. Amongst other things, the package provided for standardised risk warnings and mandatory disclosures of investors’ profits and losses, a leverage limit of 25:1 for inexperienced retail clients and a leverage limit of 50:1 for all other retail clients.
8. On 4 January 2017, the national competent authority in Austria – Finanzmarktaufsicht Österreich (hereinafter the “AT-FMA”) – issued a warning on the risks associated with CFDs, rolling spot forex and binary options²¹.
9. On 9 January 2017, both the direct and indirect advertising of speculative and risky financial instruments to retail clients by way of electronic advertising was prohibited in France on the initiative of the country’s national competent authority, the Autorité des Marchés Financiers (hereinafter the “FR-AMF”)²². The advertising ban covered not only binary options and forward foreign exchange contracts, but also extended to CFDs, applying to these financial instruments where their risk of loss was incalculable at the time of subscription or where they could result in an obligation to make additional payments.
10. In February 2017, the national competent authority in Italy – the Commissione Nazionale per le Societa e la Borsa (hereinafter the “IT-CONSOB”) – issued a specific communication to warn Italian retail clients about the risks associated with CFDs²³.
11. In March 2017, the national competent authority in Spain – the Mercado de Valores (hereinafter the “ES-CNMV”) – requested entities that market CFDs or forex products with leverage of over 10:1, or binary options, to retail clients established in Spain to expressly inform such clients that the ES-CNMV considers that, due to the complexity and the level of risk of these products, their acquisition is not suitable for retail clients. These entities were also requested to ensure that clients are informed of the cost they would have to assume if they decided to close their position upon purchasing such products and, in the case of CFDs and forex products, that they be warned that, due to leverage, the losses could be greater than the amount initially paid to purchase the relevant product. In addition, since March 2017 they have had to obtain a handwritten or recorded verbal statement from the client that allows them to prove that the client is aware that the product they are going to acquire is particularly complex and that the ES-CNMV considers it to be unsuitable for retail clients. Furthermore, the advertising material used by the entities subject to the ES-CNMV’s action to promote these products was required to contain a warning about the difficulty of understanding the products and the fact that ES-CNMV considers these products to be unsuitable for retail clients because of their complexity and the level of risk they carry. ES-CNMV also requested CY-CySEC and UK-FCA to inform CFD providers of these requirements, encouraging providers that provide services in Spain to display the same warning²⁴.
12. On 6 March 2017, the Central Bank of Ireland (hereinafter the “IE-CBI”) issued a consultation paper which sought views on two main options: (1) the prohibition of the sale or distribution of CFDs to retail clients, or (2) the implementation of enhanced investor protection measures, including a leverage limit and a requirement that retail clients be unable to lose more than the amount invested, on a per-position basis²⁵.
13. In Cyprus, CY-CySEC also issued a ban on bonuses to incentivise trading in CFDs in mid-March 2017²⁶.
14. On 3 April 2017, the national competent authority in Malta – the Malta Financial Services Authority (hereinafter the “MT-MFSA”) – published details on a measure to limit leverage to 50 in the case of CFDs and rolling spot forex contracts for retail clients. In the view of the MT-MFSA, the measure took particular account of the supervisors’ observation that some CFD providers predominantly offer the highest possible leverage to retail investors. The MT-MFSA believed that this posed significant risks to the investors concerned.
15. On 10 May 2017, the national competent authority in Greece – the Hellenic Republic Capital Market Commission (hereinafter the “EL-HCMC”) – issued a circular on providing investment services in over-the-counter derivative financial instruments (including forex, CFDs and binary options) through electronic trading platforms²⁷.
16. In addition, in Poland in July 2017, the Polish Ministry of Finance published a draft bill to amend the Polish Act on Trading in Financial Instruments in order to set maximum leverage of 25:1 across all asset classes and financial instruments traded by retail clients without CCP settlement²⁸.
17. Since October 2017, the MT-MFSA in Malta has had an Online Forex Policy in place requiring providers of CFDs, rolling spot forex and other complex, speculative products to set the following leverage limits: 50:1 for retail clients and 100:1 for retail clients which elect to be treated as professional clients²⁹.
18. In November 2017, the UK-FCA in the UK issued a warning regarding the risks associated with CFDs on cryptocurrencies³⁰.
19. In Poland on 13 December 2017, following a public consultation between July and November 2017, the Polish Ministry of Finance announced an update to the draft bill to amend the Polish Act on Trading in Financial Instruments together with a public consultation open from 13 to 22 December 2017. The new draft bill introduced 2 different maximum leverage limits: 100:1 for experienced retail clients (those who have concluded at least 40 transactions in the 24 months prior to entering into a new transaction for which a leverage limit is established) and 50:1 for inexperienced retail clients³¹.
20. In February 2018, the national competent authority in Portugal – the Comissao do Mercado de Valores Mobiliários (hereinafter the “PT-CMVM”) – issued a circular stating that investment firms shall refrain from providing trading services related to derivatives linked to cryptocurrencies if they are unable to ensure compliance with all the information obligations towards clients regarding the characteristics of the products³².

VII. Consultation on the product intervention measures

On 20 December 2018, BaFin published the draft of this General Administrative Act offering involved parties the opportunity to express an opinion pursuant to section 28 (1) of the VwVfG by 10 January 2019³³. In total, BaFin received seven responses during the consultation procedure. There were submissions from two CFD providers (deemed to be involved parties within the meaning of section 28 (1) of the VwVfG), with further submissions from one lobbyist and individual citizens. The lobbyist is fully in favour of the measures. In principle, the two involved parties are also in favour of the measures, but request a number of changes. One of the two expressly supports the introduction or maintenance of margin closeout protection and the introduction or maintenance of negative balance protection. The other proposes that the risk warnings pursuant to 2.(e) of this General Administrative Act be expanded.

However, both of the involved parties were of the opinion that the leverage limits pursuant to 2.(a) of this General Administrative Act were too restrictive or too complicated, and should be less strictly formulated. One of the two proposed the introduction of just two different higher levels of leverage. This same involved party was also of the opinion that clients would migrate from providers subject to supervision within the EU to providers outside of the EU in order to evade such over-restrictive leverage limits.

Furthermore, there was also a proposal to introduce an additional investor category of experienced retail clients who would be eligible to trade with higher leverage limits than inexperienced retail clients.

Additionally, one of the two involved parties spoke against the proportionality of the measures, indicating that the listed European brokers IG, CMC, Plus500, Playtech and XTB had lost around EUR 2.5 billion in market capitalisation since the announcement of the ESMA Decision. This party stated that losses for shareholders, including retail investors and investment funds, were huge and not proportionate. Additionally, this had also lead to losses at a foreign branch of the involved party.

One of the involved parties is of the opinion that it is inaccurate to state that, prior to 8 May 2017, a proper appropriateness assessment pursuant to section 63 (10) of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) did not normally take place. The involved party states that it has never been challenged on this issue.

B. Justification

This BaFin General Administrative Act replaces the previous BaFin General Administrative Act of 8 May 2017 and exceeds it in scope. It restricts the marketing, distribution and sale of CFDs to retail clients to the extent described above, and is thus largely equivalent to the ESMA renewal and amendment Decision (EU) 2018/1636 of 23 October 2018, the second renewal Decision (EU) 2019/155 of 23 January 2019, as well as the third renewal Decision (EU) 2019/679 of 17 April 2019. As in the ESMA Decision, the marketing, distribution and sale of options, futures, swaps and over-the-counter forward rate agreements are excluded from the restriction.

As already discussed in A. (II.), CFDs are generally marketed, distributed and sold electronically on online platforms, frequently in cross-border transactions. In order to ensure that German retail clients are afforded comprehensive protection from the risks of trading in CFDs, it is necessary to prevent CFD providers from retreating to the EU countries in which the marketing, distribution and sale of CFDs to retail clients are least regulated, or not regulated at all³⁴. The is all the more relevant because it can be assumed that the majority of Member States share ESMA’s view that providing retail clients with comprehensive protection against the risks of CFDs will require the national competent authorities of all Member States to take steps to ensure the minimum level of investor protection established in the ESMA Decision. In the majority of Member States, the national competent authorities are expected to take such steps. At the same time, if BaFin were only to restrict those CFDs that could require retail clients to make additional payments, the marketing, distribution and sale of CFDs on the German market would be at risk of increasing. According to the justification for ESMA Decision (EU) 2018/796, ESMA observed a rapid increase in the marketing, distribution and sale of CFDs to retail clients in the EU as a whole that was increasingly characterised by aggressive marketing techniques and a lack of transparent information. For this reason, BaFin has deemed it necessary to prevent CFD providers in countries in which trading in CFDs is subject to greater restriction from seeking to evade it in Germany. Such evasive behaviour cannot be prevented by merely maintaining BaFin’s General Administrative Act of 8 May 2017. For this reason alone, it is necessary for BaFin to issue a new General Administrative Act with the above notice. In addition, for other reasons described in more detail below, further restrictions beyond the ban on additional payments obligations already contained in BaFin’s General Administrative Act of 8 May 2017 are required, especially in the form of leverage limits as described in 2.(a).

According to ESMA Decision (EU) 2018/796 of 22 May 2018, comprehensive investor protection against the risks of trading in CFDs would require the national competent authorities of all Member States to take immediate steps to ensure the minimum level of investor protection established in the ESMA Decision. However, as this did not come to pass before the ESMA Decision was adopted, ESMA elected to exercise its power to temporarily restrict or prohibit the marketing, distribution or sale of financial products in order to ensure immediate protection. With the present restriction in the form of a General Administrative Act, BaFin will maintain the necessary degree of investor protection in Germany after the ESMA Decision has expired.

In BaFin’s estimation, when the ESMA Decision expires, the objective should be for the national competent authorities of each of the other EU Member States to implement national measures within their own remit that are comparable to this General Administrative Act. If all the national competent authorities of Member States were to implement comparable measures that, like this BaFin General Administrative Act, would come into force immediately upon expiry of the ESMA Decision, it would serve to restrict, across the EU, the marketing, distribution and sale of CFDs to the same extent as this edict for providers in any EU Member State, as well as for providers in countries outside the EU.

I. Legal basis

The legal basis for this BaFin General Administrative Act is Art. 42(1) of MiFIR. Pursuant to Art. 42(2) sentence 1(a)(i) of MiFIR, BaFin may limit the marketing, distribution and sale of financial instruments with particular features where there is evidence to suggest that a financial instrument gives rise to significant investor protection concerns, and that the measure is adequate considering the type of risks involved, the level of expertise of the investors or market participants in question, and the likely ramifications of the measure for investors or market participants.

In this case, these conditions are met.

1. Financial instruments with particular features

CFDs are financial instruments with particular features. They are defined as financial contracts for differences according to Art. 4 no. 15 of MiFID II and MiFID Annex I part C no. 9, and the provisions transposing these MiFID provisions into German law, i.e. section 1 (11) sentence 4 no. 3 of the German Banking Act (Kreditwesengesetz – KWG) and section 2 (3) no. 3 i. c. w. subsection 4 no. 4 of the WpHG.

2. Significant investor protection concerns in the marketing, distribution and sale of CFDs to retail clients (Art. 42(2) sentence 1(a)(i) of MiFIR)

The marketing, distribution and sale of CFDs to retail clients raise significant concerns with regard to investor protection within the meaning of Art. 42(2) sentence 1(a)(i) of MiFIR.

MiFIR introduced powers of product intervention that can be exercised directly in all Member States. This EU Regulation came into force on 3 January 2018. On 19 December 2014, ESMA published Technical Advice³⁵ on the conditions for a product intervention measure listing criteria that were reflected in Commission Delegated Regulation (EU) 2017/567 of 18 May 2016³⁶ (hereinafter the “Delegated Regulation”).

Pursuant to Art. 42(2)(a)(i) of MiFIR, product intervention measures may be adopted inter alia where significant investor protection concerns exist. In determining whether CFDs generate significant investor protection concerns, BaFin gave particular consideration to the following criteria and factors listed in Art. 21(2) of the Delegated Regulation:

- the degree of complexity of the financial instrument (Art. 21(2)(a) of the Delegated Regulation),

- the degree of transparency of the financial instrument (Art. 21(2)(d) of the Delegated Regulation),

- the particular features of the financial instrument, (Art. 21(2)(e) of the Delegated Regulation),

- the size of potential detrimental consequences (Art. 21(2)(b) of the Delegated Regulation),

- the existence and degree of disparity between the expected return or profit for investors and the risk of loss in relation to the financial instrument, (Art. 21(2)(f) of the Delegated Regulation),

- the selling practices associated with the financial instrument (Art. 21(2)(j) of the Delegated Regulation) and

- the type of clients to whom a financial instrument is marketed or sold (Art. 21(2)(c) of the Delegated Regulation).

After taking the relevant criteria and factors into consideration, BaFin has concluded that CFDs generate significant investor protection concerns for the reasons described below.

2.1 The degree of complexity and transparency of CFDs

CFDs are complex products³⁷, typically not traded on a trading venue.

The significant investor protection concerns in the case of CFDs result first and foremost from the complexity of calculation of their performance. In the case of CFDs, leverage quickly results in losing control over price performance and makes it all but impossible for the average retail client to anticipate the likelihood of losses and, consequently, the chances of success.

To avoid losses from an opened high-leverage CFD position, the retail client must be able to reliably assess the price fluctuation range of the selected underlying asset and project the price moves of the underlying within that price fluctuation range (multiplied by the applied leverage) on the margin they have put down. Unlike in the case of direct investment in underlying assets such as shares, bonds, currencies or commodity futures, in these cases the retail client is exposed to an exponentiated market risk; controlling such risk requires the kind of expertise and trading experience required of professional investors.

The margin held by the retail client on their CFD account amounts to just a fraction of the value of the corresponding underlying asset of the CFD when high leverage is applied. The higher the leverage, the smaller the fraction of the underlying asset’s value to be put down and the smaller the part of the underlying’s price fluctuation range covered by the retail client’s margin.

Prior to the implementation of BaFin’s General Administrative Act of 8 May 2017 banning CFDs entailing an obligation to make additional payments for retail clients in Germany, there was a danger that retail clients would not be aware of the actual – unlimited – extent of the risk of loss entered into. This is because they would be required put down only a fraction of the contract value as a margin on a concluded contract. The margin paid to the CFD provider for trading purposes did not serve to limit losses for the retail client. Before the implementation of BaFin’s General Administrative Act of 8 May 2017, it was undisputed within the CFD sector that the extent of the possible additional payments obligation could not be determined at the outset in the case of these leveraged financial instruments, and that the additional payments obligation was therefore unlimited. In this respect, it was not clear to the retail client what amount of money was actually at risk.

This became particularly apparent on 15 January 2015 after the decision of the Swiss National Bank (SNB) to unpeg the Swiss franc from the euro. On that day, some retail clients suffered losses a hundred times higher than the original amount invested. In one instance, an investor lost EUR 280,000 after a margin payment of around EUR 2,800³⁸. In this case, too, a high leverage was applied (1:400) in order to speculate on the exchange rate fluctuations of the aforementioned currency pair. This shows that, before the BaFin General Administrative Act of 8 May 2017 came into force, the purchase of a CFD establishing an obligation to make additional payments could drive a retail client to financial ruin.

Before the BaFin General Administrative Act of 8 May 2017 came into force, CFD providers themselves described their clients’ risk of loss as indeterminable. One CFD provider even explained on its website that, in the case of CFDs, the maximum loss could not be determined at the outset. It could far exceed the client's initial margin payment and had no upper limit. The client's risk of loss is therefore not limited to their initial margin payment but instead may extend to cover the entirety of their other assets. According to this particular CFD provider, forced closure of CFD positions in the event of an insufficient credit balance in the CFD account was undertaken solely in the provider’s interest, and the client could not infer any rights from the possibility of such a forced closure.

Another CFD provider explained on its website that the loss associated with a trade, even within a short period of time, could be considerably higher than the deposit and might even exceed it, with no upper limit on the potential loss. It went on to say that this was a feature of leveraged instruments. According to this CFD provider, during market fluctuations leverage meant that the client could share in the losses of the underlying to a disproportionate extent. If the client applied a leverage of 10, the effects of market fluctuations would be ten times greater than if the client had traded without leverage or had invested directly in the underlying. Accordingly, the greater the leverage the greater the risk. The CFD provider goes on to say that the effect of price movements on the client's trades depends on the size of their position in the respective CFD, on the leverage of their trade as well as on the size of their margin rates rather than on their account balance when they enter into the position. Small price fluctuations could therefore have a major impact on the client’s trades and on their account if they executed large trades on margin.

The ban on additional payments obligations imposed by the General Administrative Act of 8 May 2017 has already gone some way toward preventing the risks described above. However, in view of the observations made by ESMA after the BaFin General Administrative Act of 8 May 2017 was issued, it is insufficient to fully prevent disproportionate financial losses to retail clients who purchase CFDs due to the use of very high leverage observed and to the concern mentioned in (B) that CFD providers will engage in evasive behaviour. Even after the implementation of the ban on the obligation to make additional payments, it became apparent that the risk of losses to retail clients of CFDs could not be sufficiently reduced because the products remain highly complex and thus still generate significant investor protection concerns.

In addition to this, the pricing, trading terms, and settlement of CFDs is not standardised, significantly impairing retail clients’ ability to understand the terms of the product. Moreover, CFD providers often require clients to acknowledge that the reference prices used to determine the value of a CFD may differ from the price available in the respective market where the underlying is traded. This makes it extremely difficult for retail clients to check and verify the accuracy of the prices received from the provider. Retail clients will generally have no way of carrying out these exceedingly difficult checks and verifications.

The trading costs and fees incurred for CFDs increase the complexity of CFDs and make them less transparent. As already discussed, it will virtually always be especially difficult for retail clients to understand and estimate the anticipated performance of a CFD. This is made even more difficult by the effects of transaction fees on performance. Transaction fees in CFDs are normally applied to the full notional value of the trade, meaning investors incur higher transaction fees relative to their invested funds at higher levels of leverage. The transaction fees are usually deducted from the initial margin put down by the client. High leverage can thus lead to a situation where the client, at the moment of opening a CFD, observes a significant loss on their trading account, caused by the application of high transaction fees. Since transaction fees at higher leverage will erode more of the client’s initial margin, clients will be required to earn more money from the trade itself to realise a profit. This lowers the client’s chances of realising a profit net of transaction fees, exposing clients to a greater risk of loss.

In addition to transaction fees, spreads³⁹ and various other financing costs and charges to the client may be applied. These include commissions (e.g. a general commission or a commission on each trade, or on opening a CFD account) and/or account management fees. Financing charges are also usually applied to keep a CFD open (e.g. daily or overnight charges). The quantity of the various costs and charges and their effects on clients’ trading performance contribute to the lack of sufficient transparency in relation to CFDs to enable a retail client to make an informed investment decision.

Another factor increasing this complexity is the use of stop loss orders. This product feature may give retail clients the misleading impression that a stop loss order ensures execution at the price which they have set (the level of the stop loss). However, stop loss orders do not guarantee a specific level of protection; they only serve to trigger a market order when the price of the underlying reaches the price set by the client. Accordingly, the price received by the client (the execution price) can be significantly different from the price at which the stop loss was set⁴⁰. While stop loss orders are not unique to CFDs, leverage increases the sensitivity of an investor’s margin to price movements of the underlying. Thus, even with a stop loss order, the risk of sudden losses cannot be erased. For this reason, conventional trading controls like stop loss orders are not sufficient to address the investor protection concern.

This also applies for “guaranteed” stop loss orders, which function like a regular stop loss order except that closure of positions at the indicated price is guaranteed irrespective of market volatility or gapping. The extent of the retail client’s risk of loss cannot be limited in all instances even through the use of guaranteed stop loss orders. An effective limitation of the risk of loss could only be achieved if guaranteed stop loss orders were actually mandatory for all positions held by the retail client (as is true for the margin closeout protection in this General Administrative Act).

Even the market pertaining to a particular CFD will require the investor to have a great deal of knowledge that retail clients typically do not. For instance, with rolling spot forex products, investors speculate on one currency against another. If neither of these currencies are the one in which the CFD position was opened, the investor will have to be able to estimate the performances of all 3 currencies. This is also something retail clients will generally be unable to do.

CFDs with cryptocurrencies as their underlying produce other serious concerns. Cryptocurrencies are relatively new investment products that expose investors to immense risks. ESMA and other regulators have repeatedly warned of the risks involved with investing in cryptocurrencies⁴¹. For CFDs on cryptocurrencies many of these concerns remain present, and the leverage effect makes the risk of losses even greater. This is because retail clients typically do not understand the risks involved when speculating on an extremely volatile and relatively immature asset like cryptocurrencies – risks that are exacerbated by trading on margin, as this requires retail clients to react within a very short period of time.

The high complexity of calculating the performance of CFDs, the lack of transparency, the nature of the risks involved and in some cases even the type of underlying create significant investor protection concerns with regard to the marketing, distribution and sale of CFDs to retail clients.

2.2 Speculation essentially on credit

The fact that speculation using CFDs is essentially done on credit is also considered a “particular feature” of the financial instrument in the sense of Art. 21(2)(e) of the Delegated Regulation that generates significant investor protection concerns.

The leverage on CFDs makes it possible to speculate on credit from an economic standpoint. Prior to the implementation of BaFin’s General Administrative Act of 8 May 2017, any losses resulting from this speculation on credit had to be repaid, no matter their amount. The risk the retail client had to bear by speculating in this way was thus unknown to them. Investors can be understood to speculate on credit because they are only required to put down a fraction of the contract value as a margin on their CFD trading account for each CFD position. The investor is therefore exposed to the financial consequences of speculation with a given investment amount, but only have to actually hold a small percentage of that amount themselves. This is illustrated in the example in (A.)(I.) above.

In the above example, the underlying position with the risk to which the investor was exposed was worth EUR 40,000. The amount that the investor had to hold, however, was only EUR 2,000. In economic terms, it is as if the investor had acquired the amount of the CFD position exceeding the margin on credit. In the field of financial theory, a credit-financed investment strategy is considered particularly risky. If a retail client speculates with money which does not belong to them, speculative losses will have an especially strong impact on them. For retail clients, there is a risk that credit-financed speculation requiring only a fraction of the actual speculative value could result in total financial ruin if the risk of losses is not capped.

Legislators had attributed a particularly high level of risk to such credit-financed speculation even before the BaFin General Administrative Act of 8 May 2017 was issued. This is shown, for example, by the special reporting obligation for asset managers of credit-financed portfolios already established in section 31 (8) of the old version of the WpHG (corresponding to section 63 (12) of the WpHG in its current version) i. c. w. section 8 (6) of the German Investment Services Conduct of Business and Organisation Regulation (Wertpapierdienstleistungs-Verhaltens- und Organisationsverordnung; hereinafter the “WpDVerOV”). Section 8 (6) of the WpDVerOV has since been repealed, as Article 62(2) of Regulation (EU) 2017/565 supplementing Directive 2014/65/EU now applies directly and has the same content. If an investment services enterprise enters into a transaction which includes an uncovered position in a transaction with contingent liabilities, it must also inform the retail client about the uncovered (or not fully covered) losses arising from contingent liabilities.

In addition, even before the adoption of the BaFin General Administrative Act of 8 May 2017 in accordance with section 2 (3a) no. 2 of the WpHG in the version in force until 2 January 2018, legislators categorised the granting of credits or loans to others as an ancillary investment service requiring supervision where such credits or loans are granted for the provision of investment services in which the enterprise granting the credits or loans is itself involved. This is still the case pursuant to section 2 (9) no. 2 of the WpHG in the version in force since 3 January 2018. This makes it clear that legislators view credit-financed speculation practised by retail clients as an exceptional phenomenon which necessitates the creation of special provisions to protect retail clients. These assessments by legislators justify the adoption of the BaFin General Administrative Act of 8 May 2017 to protect retail clients investing in CFDs, who are economically equivalent to borrowers in this respect, against losses which exceed the amount paid into their CFD trading account and which therefore encroach on their other assets. In order to continue to protect retail clients investing in CFDs against losses which exceed the amount paid into their CFD trading account, and which therefore encroach on their other assets, after the ESMA Decision expires, this protection should be maintained by means of this new General Administrative Act.

The risk to the investor linked with credit-financed speculation, which may be especially high according to the opinion of the legislator outlined in section 2 of the WpHG, will be reduced beyond the impact of the ban on additional payments obligations by the leverage limit imposed by this General Administrative Act.

2.3 Lack of transparency in the calculation of underlyings

There is the additional danger of a lack of transparency in the prices CFD providers communicate to their clients, as well as the fact that CFD providers may be exposed to conflicts of interest that constitute significant investor protection concerns. CFD providers set the prices for clients trading on their platform. The prices set by CFD providers form the basis for the price paid by the client for each CFD. Although the price set by a CFD provider is generally guided by the listed or market price of an underlying, it is not tied to it. CFD providers are not required to follow the performance of the underlying when setting their prices. Retail clients cannot trace how prices on CFD platforms are set, and this makes them non-transparent. In addition, in the case of CFDs, the effect of the CFD provider setting a price that is not in the best interests of the client is exponentiated by the leverage applied. The lack of price transparency, the effects of which are compounded by the use of leverage, becomes especially problematic for clients where their interests and those of the CFD provider are misaligned. This happens regularly with CFDs.

Where the CFD provider is a full or – as is usually the case – a partial economic counterparty to their client, there will be a conflict of interest if the CFD position opened by the client generates risk exposure for the CFD provider.

Most CFD providers hedge a portion of their risk by matching contrary positions of different clients with one another. For example, if one client speculates that the DAX will fall and another that it will rise, the CFD provider will match these 2 positions. To the extent that they overlap, the risks of these 2 positions for the CFD provider thus cancel each other out. However, even after matching, the CFD provider will remain exposed to some risk. They will either have to hedge this risk by means of a transaction with a third party or keep it on their own books. Generally, not all risk exposure is hedged. The residual unhedged risk is then borne by the CFD provider. In this respect, there is a conflict of interest between the CFD provider on the one hand, and the clients who opened these positions on the other. A similar conflict of interest affecting the CFD provider can also occur in spite of risk exposure hedging if the provider and the counterparty to the hedge are part of a single economic unit; e.g. if the CFD provider and the counterparty belong to the same group of companies.

The sole exceptions are the rare cases in which the CFD provider executes a hedging transaction for each client order (micro-hedging), as when a direct market access business model is effectively implemented.

It is true that providers are able to set prices at their own discretion for certain other financial instruments as well, without being tied to listed or market prices. However, unlike such other financial instruments for which leverage is not used, CFDs entail the application of leverage that will additionally compounds any effect a provider’s misuse of their discretion will have on the client’s risk of loss to an extent constituting, at least for retail clients, a significant investor protection concern. Thus, as explained above, the risk of loss to retail clients was unlimited in scope prior to the adoption of the BaFin General Administrative Act of 8 May 2017. For the reasons already discussed, it is appropriate to maintain the limit on the risk of loss to retail clients achieved through the ban on the marketing, distribution and sale of CFDs with an obligation to make additional payments. Furthermore, for the reasons already discussed, the additional limitations listed in (2) which go beyond the ban on additional payments obligations are also justified.

2.4 No limitation on the risk of loss through the margin call procedure

As already explained in the BaFin General Administrative Act of 8 May 2017 – and provided that the retail client is indeed subject to an obligation to make additional payments, as was the case prior to the issue of the General Administrative Act – a margin call process on its own is insufficient to limit the extent of the retail client’s risk of loss.

Price fluctuations of the underlying may be so significant within very short intervals that the CFD provider will not have time for a margin call to the investor, and there will be no choice but to close the CFD position immediately. During unforeseen turbulence on the market, it will not be possible to fully liquidate the CFD position opened by the investor in the event of unfavourable price performance because the market maker that is the investor’s counterparty is not under obligation to continually provide price quotations. Unlike the operators of multilateral trading facilities or systematic internalisers, the CFD providers which act as market makers are not subject to the obligation to publish binding quotes during regular trading hours for the underlyings of the products they offer. The closing of an existing CFD position in order to limit losses can therefore be suspended or significantly delayed to the investor’s detriment – which is exactly what happened on 15 January 2015 during the CHF/EUR crash.

If the investor avails themselves of the investment services of a CFD provider which provides principal broking services and executes client orders with other CFD providers (market makers or liquidity providers of a liquidity pool), there may be a risk to the investor (even if price quotations are continually provided) that the liquidity providers will not make the trading volume that the investor requires available. In such instances, it will only be possible to partially close an open CFD position. Before the BaFin General Administrative Act of 8 May 2017 came into force, extreme price fluctuations could lead to a situation where the client’s losses could be many times the capital invested, despite the forced closing of the CFD position by the CFD provider. Since the adoption of the BaFin General Administrative Act of 8 May 2017, retail clients in Germany have been protected against the risk of losing more than the invested capital, or potentially many times that amount. With the entry into force of the ESMA Decision, this protection was extended to the whole EU. This new BaFin General Administrative Act will serve to uphold this protection in Germany even after the ESMA Decision expires.

2.5 Particular features or components of CFDs – especially leverage

The particular features of CFDs also raised significant investor protection concerns prior to the entry into force of limits pursuant to ESMA Decision (EU) 2018/796 of 22 May 2018 and limits defined in BaFin’s General Administrative Act of 8 May 2017.

The primary feature of CFDs is their leverage. As a rule, potential gains for the client can be increased due to this leverage, but this is also true of potential losses. Before the adoption of its General Administrative Act of 8 May 2017, BaFin had observed leverage as high as 400:1. Prior to the issue of ESMA Decision (EU) 2018/796 of 22 May 2018, other national competent authorities had noted leverage applied to CFDs across the EU ranging from 3:1 to 500:1⁴².

The application of leverage may increase the probability of a larger loss for the investor to a greater extent than it does the probability of a larger gain. Leverage hurts an investment’s performance by increasing the impact of transaction fees incurred by investors⁴³. Transaction fees in CFDs are normally applied to the full notional value of the trade and investors consequently incur higher transaction fees relative to their invested funds at higher levels of leverage. Transaction fees are usually deducted from the initial margin deposited by a client, and high leverage can lead to a situation where the client incurs a significant loss on their trading account when opening a CFD, caused by the application of high transaction fees. Since transaction fees at higher leverage will erode more of the client’s initial margin, clients will be required to earn more money from the trade itself to realise a profit. This lowers the client’s chances of realising a profit net of transaction fees, exposing clients to a greater risk of loss.

Another risk related to trading in leveraged products is linked to the interaction of high leverage and the practice of automatic margin closeout. Under commonly applied contractual terms, CFD providers are granted the discretion to close out a client’s account once the client’s net equity reaches a specified percentage of the initial margin that the client is required to pay in order to open a CFD position⁴⁴.

The interaction between high leverage and automatic margin closeout serves to increase the likelihood that an investor’s position will be closed automatically by the CFD provider in a short timeframe or that an investor will post additional margin in the hope of turning around a losing position. Higher leverage increases the likelihood that the investor will have insufficient margin to support their open CFDs because it makes the investor’s position(s) sensitive to small fluctuations in the price of the underlying, to their disadvantage.

BaFin observes that in market practice, margin closeout appears to have been introduced by CFD providers mainly to allow them to more easily manage investor risk exposure and the provider’s own credit risk by closing out the investor’s position before the funds to cover their real risk exposure are rendered insufficient. Automatic margin closeout also provides a degree of protection for investors, as it reduces (but does not eliminate) the risk that the investor will lose all or more than their initial margin.

Before ESMA Decision (EU) 2018/796 of 22 May 2018 was issued, some national competent authorities had reported to ESMA that the level at which automatic margin closeout was being applied was inconsistent across CFD providers⁴⁵. Even before the entry into force of ESMA Decision (EU) 2018/796 of 22 May 2018, BaFin and the BGFSC had observed that investor positions would be closed when funds in an investor’s account fell to between 30% and 50% of the initial margin. Prior to ESMA Decision (EU) 2018/796, CFD providers whose investors typically trade in CFDs with lower notional values were setting the standard margin closeout at between 0% and 30% of initial margin required. By eroding the investor’s funds close to 0, providers were placing investors at increased risk of losing more money than they had invested.

Until the entry into force of the BaFin General Administrative Act of 8 May 2017, retail clients in Germany, too, were exposed to the ongoing risk linked with using leverage that it would cause them to lose more money than they had invested. This is a serious risk that retail clients may not understand, even despite written warnings. The ban on additional payments obligations for retail clients introduced by means of the General Administrative Act of 8 May 2017 served to limit the risk to retail clients linked with using leverage, at least in terms of amount, to the initial margin. The margin put down by an investor acts as collateral for the position they have opened. Before the BaFin General Administrative Act of 8 May 2017 came into force, if, for example, the price of the underlying moved against an investor’s position in excess of the initial margin posted⁴⁶, they could be held liable for losses in excess of the funds in their CFD trading account, even after all of their open CFD positions had been closed. Thus even retail clients could lose more money than they originally invested.

Before Decision (EU) 2018/796 was issued, BaFin as well as other national competent authorities had reported to ESMA that a range of investors had lost significant sums of money when the Swiss franc was unpegged from the euro in January of 2015⁴⁷. When deciding to invest, many retail clients had been unaware that they could lose more money than they had invested.

The often high levels of leverage offered even to retail clients prior to the ESMA Decision, and the volatility of certain underlying assets, together with the application of transaction costs which impact the investment’s performance, could result in rapid changes to an investor’s position. This meant investors would have to take swift action to manage their risk exposure by posting additional margin to prevent the position from being automatically closed out. In such instances, high leverage could lead to large losses for investors over a very short period of time, and could increase the risk that investors would lose more than the funds they had paid in to trade CFDs.

BaFin is of the opinion that the aforementioned particular features of CFDs will continue to generate significant investor protection concerns for retail clients if they are not addressed by replacing BaFin’s General Administrative Act of 8 May 2017 with this General Administrative Act in the scope described herein after the ESMA Decision expires.

2.6 Extent of potential detrimental consequences and degree of disparity between the expected return or profit for investors and the risk of loss

If CFD trading in Germany were to become unrestricted once again, there would be significant potential detrimental consequences as well as a great disparity between the expected return and the risk of loss (Art. 21(2)(b) and (f) of the Del. Reg.). If this were to happen, it is safe to assume that large quantities of CFDs applying an unlimited additional payments obligation and very high leverage would again be sold to German retail clients, resulting in heavy losses to these clients.

As explained in A. (II.) above, the exact number of investors investing in CFDs is difficult to determine due to the often relatively short lifespan of CFD accounts and the cross-border aspect of trading.

As also explained in A. (II.) above, on the basis of the market survey conducted on behalf of CFD Verband e.V., BaFin estimates that there were more than 176,000 CFD accounts in Germany before its General Administrative Act of 8 May 2017 was issued. It can be assumed that Germany would see an immediate and broad-based resurgence of (active) sales of CFDs with additional payments obligations and high leverage, and without sufficient risk warnings disseminated to retail clients, if the ESMA Decision were to expire and an immediate and permanent ban were not imposed by a BaFin General Administrative Act. Thus, to prevent the creation of significant investor protection concerns, it is appropriate to issue this General Administrative Act with the scope described in the notice.

Before ESMA Decision (EU) 2018/796 was adopted, information provided by various national competent authorities to ESMA indicated that the number of retail clients investing in CFDs and the number of providers offering these products had increased across the EU:

a) Before Decision (EU) 2018/796 was adopted, BaFin and most other national competent authorities had notified ESMA of both the authorised providers for their country⁴⁸ who were selling CFDs to retail clients and the CFD providers from other countries doing the same⁴⁹. Several other national competent authorities also reported to ESMA that CFD providers were using local offices or contractual intermediaries to market, distribute and sell CFDs in the countries where they were not headquartered⁵⁰.

b) Before Decision (EU) 2018/796 was adopted, CY-CySEC and UK-FCA had notified ESMA of an increase in the number of providers specialising in the sale of CFDs to retail clients on a cross-border basis from 2016 to 2017. In Cyprus, the number of such providers rose from 103 to 138; in the UK, it rose from 117 to 143.

c) In addition, prior to the adoption of ESMA Decision (EU) 2018/796, UK-FCA had noted an increase in the number of authorisation requests by investment firms providing CFDs. Newer markets such as Greece, Hungary, Portugal and Slovakia had also observed an increase in applications for authorisation for investment firms offering CFDs before the ESMA Decision was adopted⁵¹.

In ESMA’s Decision of 22 May 2018, based on data it had gathered from a number of national competent authorities⁵², it estimated that the number of retail client trading accounts with EEA-based CFD and binary option providers had increased from 1.5 million in 2015⁵³ to approximately 2.2 million in 2017⁵⁴.

Before Decision (EU) 2018/796 was adopted, several other national competent authorities⁵⁵ had reported concerns to ESMA that as some national markets became more restricted due to national measures (e.g. Belgium⁵⁶ and France⁵⁷), CFD providers were likely to seek out clients in other Member States.

The following studies carried out by other national competent authorities prior to the adoption of ESMA Decision (EU) 2018/796 show that the majority of retail clients investing in CFDs in these Member States lost money on these trades:

a) CY-CySEC analysed a sample of retail client accounts (approximately 290,000) with 18 major CFD providers for the period from 1 January 2017 to 31 August 2017. It found that on average, 76% of these client accounts made overall losses for that particular period, with around 24% of client accounts making a profit. The average loss per account was around EUR 1,600.

b) ES-CNMV found that approximately 82% of retail clients⁵⁸ lost money over a 21-month period between early 2015 and late 2016. The average loss per retail client was EUR 4,700⁵⁹.

c) FR-AMF found that more than 89% of retail clients lost money over the 4-year period from 2009 to 2013, with an average loss per retail client of EUR 10,887⁶⁰. In addition, data provided by FR-AMF from the French national office of the ombudsman indicated that the average overall loss per CFD complainant in 2016 was EUR 15,207. The office of the ombudsman also noted that in 2016 and 2017 in particular, the practices of regulated providers became even more aggressive, increasingly targeting investors likely to make large payments. A number of complaints regarding incidents of harassment and manipulation were submitted by applicants with substantial savings. Figures for the 2016 mediations before the French ombudsman appear to support this, with an average recovery amount of EUR 11,938 and with more than EUR 5,000 recovered in half of all cases. In some of the cases settled, the investor had lost more than EUR 90,000. The cumulative losses in cases involving authorised providers exceeded EUR 1 million. In addition, FR-AMF found that the retail clients who traded the most (by number of trades, average trade size or cumulative volume) also lost the most. The same was true of retail clients who continued to trade over longer periods of time, indicating a lack of any learning curve.

d) The Croatian national competent authority, Hrvatska agencija za nadzor financijskih usluga (hereinafter “HR-HANFA”), investigated the loss per investor incurred with a firm offering CFDs. The study assessed the gains and losses of 267 retail clients for the period from January to September 2016. HR-HANFA found that the total retail client losses for the period came to approximately EUR 1,017,900 while total retail client gains were only around EUR 420,000⁶¹.

e) In 2015, IE-CBI performed a market survey showing that 75% of retail clients who traded CFDs in 2013 and 2014 suffered losses. The average loss per retail client was EUR 6,900. A follow-up review of a sample of the largest CFD providers in Ireland found that over the 2-year period from 2015 to 2016, 74% of retail clients lost money, with average losses of EUR 2,700⁶².

f) Studies by IT-CONSOB conducted during 2016 show that from 2014 to 2015, 78% of the Italian retail clients of a specific CFD provider lost money investing in CFDs, while 75% lost money investing in rolling spot forex, with average losses of EUR 2,800. There was also found to be a correlation between the number of trades made by retail clients and the amount of losses suffered. A subsequent survey of 5 Italian branch locations of CFD providers conducted on behalf of IT-CONSOB in March 2017 found that in 2016, retail client losses were as much as 83% with an average loss per retail client of around EUR 7,000⁶³.

g) In Q1 2017, PL-KNF conducted a study⁶⁴ based on data provided by 10 investment firms offering CFDs. The study covered 130,399 client accounts, of which 38,691 were active, and concluded that 79.28% of the investors lost money in 2016. The average loss per investor was PLN 10,060. According to a similar study conducted in Q1 2018 based on data provided by 7 investment firms offering CFDs in Poland in 2017 (177,883 client accounts, of which 40,209 were active), 79.69% of the investors lost money in 2017. The average loss per investor in 2017 was PLN 12,156. The percentages of active investors⁶⁵ who lost money were 81% (2012), 81% (2013), 80% (2014), 82% (2015), 79% (2016) and 80% (2017).

h) A study carried out by LU-CSSF reported in September 2017 that for 2 LU-CSSF-authorised CFD providers, the average losses per retail client were about EUR 4,500 and EUR 1,700, respectively⁶⁶.

i) An analysis performed by UK-FCA in 2014 on a sample of non-advised retail client accounts with 8 CFD providers indicated that 82% of retail clients lost money on these products. According to the analysis, the average loss per retail client for the year was GBP 2,200. Information received during UK-FCA’s December 2016 consultation process also found a correlation between higher leverage levels and increased probability and size of losses⁶⁷. A further study by UK-FCA in 2016/2017 on advisory and discretionary services provided for CFDs over a 12-month period found further evidence of poor outcomes for retail clients. This review found that within the population of firms offering CFDs paired with advisory and discretionary management services, 76% of retail clients lost money, experiencing losses of GBP 9,000 on average. Even when the profitable retail clients were taken into consideration, on average, a typical retail client investing with an advisory and discretionary managed account lost around GBP 4,100⁶⁸.

j) PT-CMVM observed that on positions with a notional value of EUR 44.7 billion, retail clients incurred losses of EUR 66.8 million; for the notional value of EUR 44.2 billion, this figure was EUR 47.7 million⁶⁹.

Another study was carried out in 2016 by the Norwegian national competent authority, Finanstilsynet (hereinafter “NO-Finanstilsynet”), on the trading results of clients of 6 CFD providers. The study included approximately 1,000 retail clients⁷⁰ trading in CFDs over 1 or 2 years between January 2014 and December 2015. It showed that 82% of those retail clients lost money, with an average loss per client of EUR 29,000. The average transaction costs relative to a client’s margin were 37% (due to high leverage and frequent trading)⁷¹.

The percentage of retail clients losing money in the AMF study⁷² referred to in (c) is remarkably consistent from year to year between 2009 and 2013, despite varying annual returns, e.g. in the stock market and commodity indices over the same period⁷³. In contrast with the positive historical returns on (long-term) investments in other financial products such as equity funds, the characteristic persistence of the losses incurred by retail clients investing in CFDs points to a structural problem with the return profile of these instruments.

The studies described above paint a stark picture of the significant investor protection concerns raised by the offer of these CFDs to retail clients prior to the BaFin General Administrative Act of 8 May 2017 and ESMA Decision (EU) 2018/796.

2.7 CFD marketing and distribution

Although CFDs are complex products, before the BaFin General Administrative Act of 8 May 2017 came into force, they were most commonly offered to retail clients over electronic trading platforms, without the provision of investment advice or portfolio management. Thus, there are also significant investor concerns with how CFDs are sold (Art. 21(2)(j) of the Del. Reg.).

Pursuant to section 63 (10) of the WpHG⁷⁴, if CFDs are offered on electronic trading platforms without the provision of investment advice or portfolio management, their appropriateness for clients must be assessed. To assess appropriateness, section 63 (10) sentence 1 of the WpHG does require investment firms to ask their clients or potential clients to provide information about their knowledge and experience of the specific product or service being offered or requested, so as to enable the provider to determine whether that product or service is appropriate for the client. However, even in cases in which the appropriateness assessment pursuant to section 63 (10) of the WpHG establishes that the CFD in question is inappropriate for the client or potential client, the transaction can still be carried out once a simple warning has been given, in accordance with section 63 (10) sentences 3 and 4 of the WpHG. Moreover, pursuant to section 63 (10) sentence 4 of the WpHG, the transaction can even be concluded following the issue of a simple warning in cases in which the client has previously provided insufficient information, or none at all. BaFin is of the opinion that this simple warning, unlike to the restrictions proposed herein, will not prevent (potential) clients from trading in CFDs. The failure of a (potential) client to provide any or sufficient information to the provider as to their knowledge and experience in the investment field relevant to the specific type of product in question does not automatically prevent the retail client from gaining access to products which, like the CFDs described herein, should not be sold to them due to their particular features. This even holds true where the provider has concluded that a product is not suitable for the (potential) client based on the information provided about their knowledge and experience with that type of investment. This means that retail clients can gain access to products like the CFDs described in this notice, despite the fact that these products should not be sold to them because of their features⁷⁵.

Long before ESMA Decision (EU) 2018/796 was issued, UK-FCA had noted multiple failures on the part of CFD providers to adequately assess appropriateness. These included inadequacies in the assessment itself, inadequate risk warnings to retail clients who failed appropriateness assessments, and the failure to establish a process to determine whether clients who fail the appropriateness assessment but who nonetheless wish to trade CFDs should be allowed to proceed with CFD transactions⁷⁶. Revisiting this issue in late 2016, UK-FCA found that a significant number of providers had not remedied these shortcomings, even after receiving feedback on them⁷⁷.

Furthermore, like other national competent authorities, BaFin has voiced concerns which are reflected in ESMA Decision (EU) 2018/796 of 22 May 2018 about CFD providers’ compliance with their obligation to give their clients information that is honest, clear and not misleading, and to act in their clients’ best interests⁷⁸.

Before ESMA Decision (EU) 2018/796 was issued, other national competent authorities had also observed aggressive marketing practices as well as misleading marketing communications in the CFD sector⁷⁹. These included the use of sponsorship arrangements or affiliations with major sports teams, which give the misleading impression that complex and speculative products such as CFDs are suitable for the retail mass market by promoting general brand name awareness. In addition, CFDs are often advertised with misleading statements like “Trading has never been so easy”, “Start your career as a trader right now” or “Earn GBP 13,000 in 24 hours! What are you waiting for?”⁸⁰.

Furthermore, before ESMA Decision (EU) 2018/796 of 22 May 2018, several national competent authorities had voiced concerns about how appropriateness was assessed⁸¹ in practice and the unsatisfactory nature of the warnings provided to clients when they failed them⁸². Examples of these practices are described in ESMA’s Questions and Answers relating to the provision of CFDs and other speculative products to retail clients under MiFID, and were the basis for drafting them⁸³.

During the production of the CFD Q&A, BaFin and some national competent authorities reported to ESMA that CFD providers failed to adequately disclose the risks of these products⁸⁴. As illustrated, prior to the General Administrative Act of 8 May 2017, BaFin had established that CFD providers were especially lax when it came to adequately communicating the potential for rapid losses capable of exceeding investor capital. Other national competent authorities reported the same phenomenon prior to ESMA Decision (EU) 2018/796⁸⁵.

Before Decision (EU) 2018/796, other national competent authorities had also reported concern to ESMA about the business models of CFD providers, which appeared to resemble the practice of churning⁸⁶. Because the average life span of a client account can be relatively short⁸⁷, providers may feel a certain pressure to maintain a steady stream of new clients. This may incentivise providers to adopt aggressive marketing and sales techniques that are not in retail clients’ best interests.

In Germany (at least until BaFin’s General Administrative Act of 8 May 2017 came into force) and the rest of the EU (at least until ESMA Decision (EU) 2018/796 came into force on 1 August 2018), a common marketing and sales technique adopted by the CFD industry to encourage retail clients to invest in CFDs was to offer trading benefits (monetary and non-monetary) such as bonuses, gifts (holidays, cars, electronics, etc.), trading tutorials or discounts (on spread or fees, for example)⁸⁸.

Bonuses and other trading benefits can distract from the high-risk nature of trading in CFDs. Their purpose is typically to attract retail clients and incentivise them to trade or continue trading. Retail clients may see these promotions as such a central product feature that they could then fail to perceive the level of risk associated with the product.

Furthermore, the benefits of this type offered when a CFD trading account is opened often require clients to pay funds to the provider and acquire a certain number of CFDs over a given period. The reality is that most retail clients lose money trading in CFDs. Often, using bonuses to increase retail client CFD trading volumes can cause retail clients to lose more money trading CFDs than they would have lost had no bonus been offered.

BaFin and other national competent authorities⁸⁹ observed that the terms and conditions of promotional offers were often misleading, and that many investors were unaware of the conditions under which such benefits/bonuses could be accessed. Finally, many investors have reported difficulties in withdrawing funds when trying to use such bonuses.

In addition to the factors outlined above, prior to ESMA Decision (EU) 2018/796, many other national competent authorities⁹⁰ had noted that distribution models observed in this sector of the market caused particular conflicts of interest⁹¹. The pressure to maintain a pipeline of new clients increases the risk/danger of conflicts of interest. As explained in detail under B. I. 2.3 above, additional significant conflicts of interest arise when CFD providers (or groups of companies to which they belong) are economically equivalent to counterparties to their clients’ trades, but do not hedge their risk, putting their interests in direct opposition to those of their clients. For these providers there is a greater risk and incentive to manipulate or use less transparent reference prices, or to pursue other questionable practices such as cancelling profitable trades on spurious pretexts. There is also a risk that providers may seek to exploit asymmetric slippage (e.g. pass on any loss as a result of slippage to the client, while retaining any profit obtained as a result of slippage). Providers may further exploit this by purposefully creating delays between quotes and the execution of CFD trades. Before the ESMA Decision was issued, other national competent authorities had also identified practices whereby CFD providers applied an asymmetrical or inconsistent mark-up to core spreads. This allowed CFD providers to generate additional profits/income, further incentivising the use of marketing and distribution strategies that were not in investors’ interests.

All this goes to show that significant investor protection concerns are also generated by the way in which CFDs were marketed and distributed to retail clients before BaFin’s General Administrative Act and ESMA Decision (EU) 2018/796 came into force.

2.8 Type of clients involved

As already demonstrated above, CFD providers almost exclusively target retail clients within the meaning of Art. 4(1) no. 11 of MiFID II, based on the observations made by BaFin in the course of its supervisory duties.

Unlike professional investors, however, retail clients virtually always lack the requisite experience, knowledge and expertise to adequately assess the risks associated with unrestricted CFD trading.

Before ESMA Decision (EU) 2018/796 came into force, and as reflected in it, it was revealed in a study in one Member State that the highest maximum leverage levels were often those offered to retail clients, while professional clients and eligible counterparties were offered lower maximum leverage levels⁹². In view of the evidence of losses to retail client accounts observed by BaFin, ESMA and other national competent authorities and described in detail in this General Administrative Act, it is clear that unrestricted CFD trading would raise significant investor protection concerns with regard to this category of investor.

3. No adequate alternative means of addressing the risks described in Article 42(2) sentence 1(a) of MiFIR with increased supervision or enforcement of existing requirements (Article 42(2) sentence 1(b) MiFIR)

In light of the requirements mentioned in Article 42(2) sentence 1(b) of MiFIR, BaFin has examined whether adequate alternative means exist of addressing the risks described in Article 42(2) sentence 1(a) of MiFIR after the temporary ESMA Decision in accordance with Art. 40 of MiFIR has expired which could resolve the issue through greater supervision or better enforcement of existing regulatory requirements in accordance with EU law. The applicable existing regulatory requirements are set out in MiFID II, Commission Delegated Directive (EU) 2017/593 supplementing MiFID II, Commission Delegated Regulation (EU) 2017/565 supplementing MiFID II, MiFIR, and Regulation (EU) No 1286/2014 of the European parliament and of the Council, as well as in acts of transposition into national law in the WpHG and WpDVerOV.

These requirements include, inter alia:

a) the requirement to provide clients with adequate information as described in Art. 44 to 51 of Commission Delegated Regulation (EU) 2017/565 implementing Art. 24(3) and (4) of MiFID II⁹³;

b) the requirement to assess suitability and appropriateness described in Art. 54 to 56 of Commission Delegated Regulation (EU) 2017/565 implementing Art. 25(2) and (3) of MiFID II⁹⁴;

c) the requirement of best execution of client orders described in Art. 64 to 66 of Commission Delegated Regulation (EU) 2017/565 implementing Art. 27 of MiFID II⁹⁵;

d) the product governance requirements described in Art. 9 and 10 of Commission Delegated Directive (EU) 2017/593 and discussed in detail in the ESMA Guidelines on MiFID II product governance requirements (ESMA35-43-620) implementing Art. 16(3) and Art. 24(2) of MiFID II;

e) the product information requirements for manufacturers of packaged products for retail clients described in Art. 5 to 14 of Regulation (EU) No 1286/2014.

Beyond the requirements listed under (a) to (e), it was also considered whether

f) BaFin could mitigate the significant investor protection concerns by exercising its supervisory powers in accordance with Art. 69 of MiFID II.

The scope of application and content of some of the regulatory requirements pursuant to MiFID II and MiFIR are similar to pre-existing regulatory requirements pursuant to Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC (hereinafter “MiFID”)⁹⁶.

MiFID II and MiFIR were adopted with the aim of improving (including through powers of product intervention) what MiFID had achieved in terms of investor protection with regard to certain specific aspects of investment services and activities. The provisions of MiFID II on the risks and detriment to investors – risks and detriment that this General Administrative Act will serve to mitigate when the ESMA Decision in accordance with Art. 40 of MiFIR expires – are not materially different from those of MiFID.

a) BaFin evaluated whether the provisions on fair client information in Section 63 (1), (6) and (7) of the WpHG⁹⁷ sufficiently address the risks described in Art. 42(2) sentence 1(b) of MiFIR, and whether the problem could be better solved by means of greater supervision or enforcement of the requirements imposed by these provisions. The requirements for providing clients with adequate information are further elaborated in MiFID II. German legislators have transposed these regulations into national law by incorporating them into the WpHG. Significant improvement in the realm of client cost and fee information has been achieved with a provision mandating that clients be provided with consolidated information about all of the costs and fees associated with relevant securities services and financial instruments.

However, disclosure-based rules alone – including improved information on costs – are insufficient to address the risk arising from the marketing, distribution and sale of complex products like CFDs to retail clients.

Section 63 (6) of the WpHG requires investment firms inter alia to ensure that all information addressed to clients or potential clients is fair, clear and not misleading, including marketing communications. Furthermore, section 63 (7) i. c. w. section 64 (1) of the WpHG requires investment firms to provide clients and potential clients in a timely manner with the appropriate information – on the firm and its services, the financial instruments and proposed strategies, execution venues and all costs and related charges – necessary for them to understand, after careful consideration, the nature of the financial instruments or services they are being offered or have requested, and the associated risks, so that they may decide on this basis whether or not to invest. Above all, this information must include appropriate guidance on and warnings of the risks associated with investing in these financial instruments, and on whether the financial instruments are intended for retail or professional clients. When the ESMA Decision expires, the unique nature of the above investor protection concerns in the case of CFDs will make it impossible to fully and appropriately control the detrimental impact on retail clients through the application of section 63 (6) of the WpHG and section 63 (7) i. c. w. section 64 (1) of the WpHG alone. The information in section 63 (7) i. c. w. section 64 (1) of the WpHG does an inadequate job of drawing retail clients’ attention to the specific consequences (risk of unlimited losses) of investing in these products, and the risks inherent to these products are thus insufficiently mitigated.

b) Furthermore, MiFID II reinforces the suitability and appropriateness requirement for financial instruments for sale to investors (product assessment based on client knowledge and experience, financial situation and investment objectives) by requiring investment firms to provide clients with an explanation of the suitability of the financial instrument in question and to assess suitability based on client information and on the characteristics of the specific financial instrument before the contract is entered into. These regulations have also been transposed into German law by incorporation into the WpHG.

Section 64 (3) of the WpHG requires investment firms such as CFD providers to collect the requisite information on the client’s or potential client’s knowledge and experience of trading in specific types of financial instrument, their financial situation including their ability to bear losses, and their investment objectives including their risk tolerance (suitability assessment). The object of the obligations imposed by the WpHG is to enable the provider to recommend financial instruments to the client or potential client that are suitable for them, and in particular, for their risk tolerance and ability to bear losses. However, the above requirements apply only to cases in which advisory or portfolio management services are subsequently provided. Due to the fact that CFDs are most commonly marketed, distributed and sold on electronic platforms without accompanying advisory or portfolio management services, and retail clients are thus generally not protected by investment advice or portfolio management from the very high risk associated with CFDs in particular, an application of section 64 (3) of the WpHG offers no adequate alternative means of mitigating the risks described in Art. 42(2) sentences 1(a) and (b) of MiFIR.

As already explained under (2.7) above, pursuant to section 63 (10) of the WpHG, the appropriateness of the financial instrument for the client must be assessed (appropriateness assessment) where CFDs are offered on electronic trading platforms without accompanying investment advisory or portfolio management services (execution only).

To assess appropriateness, section 63 (10) sentence 1 of the WpHG does make it necessary for investment firms to ask their clients or potential clients to provide information about their knowledge and experience of the specific product or service being offered or requested, so as to enable the provider to determine whether that product or service is appropriate for the client. However, even if the appropriateness assessment has shown that the financial instrument is inappropriate for the client or potential client, they will nonetheless be able to trade in the financial instrument once a warning has been issued in accordance with section 63 (10) sentence 3 of the WpHG. Moreover, pursuant to section 63 (10) sentences 3 and 4 of the WpHG, the trade can even be concluded with the client or potential client following the issue of a simple warning in cases in which they have previously provided insufficient information, or none at all, and an appropriateness assessment is therefore impossible to make. In these cases, it is only necessary to provide the client with the relevant information. CFDs are complex financial instruments, and therefore always require an appropriateness assessment pursuant to section 63 (10) of the WpHG. However, BaFin estimates that in Germany, before its General Administrative Act of 8 May 2017 was issued, appropriateness assessments compliant with section 63 (10) of the WpHG were not usually performed. Nor, in ESMA’s opinion, did investment firms in other EU Member States usually perform appropriateness assessments that would comply with section 63 (10) of the WpHG prior to the purchase of CFDs by retail clients, before Decision (EU) 2018/796 was issued. This was revealed in the course of supervision by BaFin prior to the adoption of the General Administrative Act of 8 May 2017 and by other national competent authorities prior to the adoption of ESMA Decision (EU) 2018/796⁹⁸. Even if a warning is issued in cases in which there has been no methodical appropriateness assessment and the CFD in question is generally not appropriate for retail clients, it does not, in many instances, prevent retail clients from trading (on an execution-only basis) in these complex financial instruments. Indeed, one provider indicates in its submission to the consultation that it has not been challenged by BaFin on this issue. However, full consideration of all providers indicates that proper appropriateness assessments pursuant to section 63 (10) of the WpHG were not generally performed by investment firms, and that there were therefore exceptions. As a result, the statement that, in Germany, before BaFin’s General Administrative Act of 8 May 2017 was issued, appropriateness assessments compliant with section 63 (10) of the WpHG were not usually performed by investment firms, is correct.

Thus, no adequate alternative means exists of mitigating the risks and resolving the issue through increased supervision or the enforcement of existing requirements using effective suitability and appropriateness assessments.

c) With regard to best execution, most of the current best execution rules already existed in their own right under MiFID. MiFID II reinforced these rules, and they were transposed into national law through incorporation into the WpHG. Section 82 (1) of the WpHG in particular requires investment firms to take every necessary precaution to obtain the best possible results when executing their clients’ orders. In addition, pursuant to section 82 (9) to (13) of the WpHG i. c. w. Del. Reg. (EU) 2017/576 and MiFIR, market participants must publish additional information on the quality of execution achieved. Investment firms in particular are required to release regular publications for each category of financial instrument containing the 5 most important execution venues used to execute client orders during the previous year and a report on the execution quality obtained.

However, BaFin is of the opinion that even given the updated provisions on best execution in MiFID II, none of the established concerns raised by the marketing, distribution and sale of CFDs to retail clients can be mitigated through a greater degree of supervision or enforcement of existing best execution requirements.

It is true that the increased transparency surrounding order execution, and especially information about how an investment firm executes client orders, help clients to better understand and evaluate the quality of the firm’s execution practices, and thus to better assess the quality of the overall service provided to them. The requirements pertaining to best execution also reinforce the best execution standard in relation to OTC products, because they require firms to verify whether the price being proposed to the client is fair when executing an order or deciding to trade OTC products, including bespoke products. However, these requirements are insufficient to mitigate the risks associated with the marketing, distribution and sale of CFDs. The same is true of the obligation imposed by the WpHG as a result of MiFID II to gather market data and use it to estimate the prices of such products, and to compare these with similar or comparable products where possible. It was not until ESMA Decision (EU) 2018/796 of 22 May 2018 that these risks could be effectively addressed. The risks will re-emerge if BaFin does not prevent them by issuing this General Administrative Act after the temporary ESMA Decision in accordance with Art. 40 of MiFIR expires.

ESMA had previously reviewed the risks discussed above in the context of the existing regulatory requirements on multiple occasions, in investor warnings⁹⁹, Q&As¹⁰⁰ and its Opinion on “MiFID practices for firms selling complex products”¹⁰¹. ESMA had also carried out supervisory convergence work through, inter alia, the Joint Group. Despite ESMA’s extensive use of its non-binding instruments to ensure a consistent and effective application of the existing regulatory requirements, up to the entry into force of its Decision (EU) 2018/796 of 22 May 2018 on 1 August 2018, the investor protection concerns with regard to retail clients had nonetheless persisted (to the extent not mitigated by the BaFin General Administrative Act of 8 May 2017). As BaFin does not hold broader supervisory powers at a national level, it is apparent that even an effective application of the existing regulatory provisions on the part of BaFin will be insufficient to mitigate the established investor protection concerns after the temporary ESMA Decision in accordance with Art. 40 of MiFIR expires.

d) BaFin also evaluated whether the product governance provisions in sections 63 (4) and (5), 80 (9) to (13), and 81 (4) of the WpHG, and sections 11 and 12 of the WpDVerOV¹⁰² sufficiently address the risks described in Art. 42(2) sentence 1(b) of MiFIR, and whether the problem could be better solved by means of greater supervision or enforcement of the requirements imposed by these provisions.

The major obligations imposed by these provisions on investment firms manufacturing financial instruments for sale to end clients (manufacturers) are those of maintaining, applying and reviewing an approval protocol for each individual financial instrument and each material change made to an existing financial instrument before it is marketed or sold to clients (product approval process). Manufacturers must also ensure that products correspond to the needs of a particular target market, and that the distribution strategy used for them is compatible with their target market. What’s more, manufacturers must take reasonable steps to ensure that financial instruments are in fact distributed to their specific target market. Finally, manufacturers are required to regularly review financial instruments, and the definition of target markets in particular.

The provisions on product governance largely require investment firms that offer or propose CFDs manufactured by other firms (distributors) to implement product approval measures sufficient to ensure that the products and services they seek to offer or propose are compatible with the needs, features and objectives of the particular target market, and that the intended distribution strategy corresponds to that target market. In this sense, distributors are required to determine a target market for the financial instruments they distribute while taking their clients into consideration, and while also considering the manufacturer’s target market. If a manufacturer has not determined a target market for a financial instrument, e.g. because they are not subject to the product governance requirements in MiFID II or the WpHG, or because the CFD was manufactured in a third country, the distributor must determine the target market themselves. Distributors have to understand the CFDs they offer or propose, evaluate the compatibility of the CFD with the need of the clients to whom they are providing securities services, and ensure that CFDs are only offered or proposed where it is in the client’s interests.

When manufacturers and distributors determine a target market for a financial instrument, among other features, the client category in particular (retail client, professional client or eligible counterparty) with which the financial instrument is compatible must be indicated. Like other national competent authorities and ESMA, BaFin is of the opinion that retail clients as a category should be excluded when target markets are determined for CFDs, in light of the features of these financial instruments (inter alia, a high rate of losses, unlimited potential losses, and the complexity of calculating the performance of CFDs).

In BaFin’s view, after the temporary ESMA Decision in accordance with Art. 40 of MiFIR expires, even the steps BaFin could take to systematically enforce product governance requirements would fail to prevent retail clients from losing, in all likelihood, the capital they invest in CFDs to the same extent that this could be prevented by the restrictions set out in this General Administrative Act. It is true that efforts could be made to prevent CFDs from being distributed to retail clients through the mechanism of the target market definition process discussed above, i.e. excluding retail clients from the admissible target markets or adding them to a blacklisted target market group (see BT 5.4.1 of “MaComp”). However, this option for affecting such distribution would require numerous intermediate steps, would function indirectly and would thus not fully achieve the objective. In an initial step, manufacturers and distributors would have to be obligated to remove retail clients from the target market as required. Then, in a second step, distributors would have to be obligated to respect this target market in their distribution activities. The investment firms affected would have to be responsible for carrying out a third step in which they ensured that the obligation was being implemented and complied with (operations departments, compliance role, internal auditing). In addition to this, BaFin would have to monitor the cooperation between manufacturers and distributors when defining and respecting the target market in each individual instance, requiring many more intermediate steps, and would potentially have to take measures to enforce the obligation in individual cases where affected firms failed to adhere to it themselves. In BaFin’s view, even if this indirect, step-by-step process is carried out, but the choice is made to forego the restrictions set out in this General Administrative Act, it can be expected that after the ESMA Decision expires, large numbers of retail clients will once again begin to purchase CFDs, and that once again, this will cause a very high proportion of retail clients to incur significant losses that may even exceed the margin held on their CFD trading accounts. In BaFin’s estimation, the full effect of the indirect, step-by-step procedure described above would only be felt after a significant delay; furthermore, it would fall short of the restrictions described herein to a non-negligible extent. This General Administrative Act prevents the provision to retail clients of CFDs that entail an obligation to make additional payments, apply high leverage or lack a risk warning. Thus, the indirect, step-by-step procedure described above is not as well equipped to address the identified investor protection concerns as this restriction would be. In light of this and of the many cases prior to the entry into force of the BaFin General Administrative Act of 8 May 2017 in which a client lost all of the funds on their CFD trading account, and in a number of which cases the losses exceeded or far exceeded the margin held on the client’s CFD trading account, the indirect, step-by-step procedure cannot, in some instances, serve as an adequate alternative means of addressing investor protection concerns after the ESMA Decision expires.

e) Art. 5 to 14 of Regulation (EU) No 1286/2014, the PRIIPs Regulation (on packaged retail and insurance-based investment products, hereinafter referred to as “PRIIPs”), contain disclosure requirements. This regulation sets out uniform rules on the format and content of the key information document to be provided by manufacturers of packaged retail and insurance-based investment products to retail clients in order to help them understand and compare the key features and risks of a PRIIP. In particular, Art. 5 of the PRIIPs Regulation, as further specified in Commission Delegated Regulation (EU) 2017/653, sets out inter alia a methodology for the presentation of the summary risk indicator and accompanying explanations, including whether the retail client can lose all invested capital or incur additional financial commitments. However, this type of disclosure does not sufficiently draw retail clients’ attention to the consequences of investing in CFDs in particular. Performance information, for example, pertains only to the individual CFD. The information requirements imposed by the PRIIPs Regulation are inherently dependent on the product in question. They cannot give clients access to information about the total percentage of retail client accounts that lose the capital invested. For CFDs, which are inherently unsuitable for retail clients, a regulatory solution that relies solely on the enforcement of product information obligations to protect the investor will not be sufficient after the ESMA Decision expires.

f) Efforts to mitigate the significant investor protection concerns had already proven unsuccessful before the BaFin General Administrative Act of 8 May 2017 and the ESMA Decision came into force; for example, BaFin’s pronouncement of a temporary ban on professional activities by virtue of its supervisory powers pursuant to Art. 69 of MiFID II, as transposed into national law inter alia in section 6 (8) of the WpHG. BaFin does, for example, have the power pursuant to section 6 (8) of the WpHG to prohibit an individual employed at a firm under BaFin’s supervision from engaging in professional activities for a period of up to 2 years if they are wilfully in breach of a provision from section 6 (6) sentence 1 no. 1 to 4 and 6 of the WpHG, or of an order by BaFin relating to these provisions, and if this behaviour continues despite BaFin having issued a warning. However, it is possible to prohibit professional activity only indirectly, after a series of preliminary steps. In addition, many CFD providers are not subject to supervision in the sense of section 6 (8) of the WpHG. Nor do the other supervisory powers afforded to BaFin through the implementation of Art. 69 of MiFID II enable it to effectively mitigate the aforementioned significant investor protection concerns.

BaFin is of the opinion that, in the absence of a product intervention pursuant to Art. 42 of MiFIR to restrict CFD trading, even the cumulative enforcement of all of the above requirements under (a) to (f) will fail to prevent these significant investor protection concerns in the same manner. Even if the BaFin General Administrative Act of 8 May 2017 were again applied after the temporary ESMA Decision expires and the above requirements under (a) to (f) were cumulatively enforced, the significant investor protection concerns could not be addressed to the same extent as with this new General Administrative Act.

Therefore, BaFin is of the opinion that there are no adequate alternative means in place of addressing the risks listed in Art. 42(2) sentence 1(a) of MiFIR and of resolving the issue through increased supervision and greater enforcement of existing requirements after the ESMA Decision expires. The restrictions on the marketing, distribution and sale of CFDs to retail clients imposed by the present General Administrative Act are thus necessary to mitigate the described significant investor protection concerns following the expiration both of the temporary ESMA Decision in accordance with Art. 40 of MiFIR, and – because it will have been replaced – of BaFin’s General Administrative Act of 8 May 2017.

II. Exercising discretion

For the purposes of the aforementioned measure, I have exercised the discretion granted to me under Art. 42(1) of MiFIR. The measure is proportionate because it is suitable, necessary and appropriate.

1. Suitability of the restriction

Restricting the marketing, distribution and sale of CFDs to retail clients is a suitable method for achieving the legitimate aim pursued with this measure. The restriction will eliminate the significant investor protection concerns arising for the reasons set out above because, after the temporary ESMA Decision in accordance with Art. 40 of MiFIR expires, it will only be possible to market, distribute and sell CFDs to retail clients in Germany under the conditions described in the notice.

2. Necessity of the restriction

Restricting the marketing, distribution and sale to retail clients to the extent described in the notice will also be necessary from the expiry of the ESMA Decision. There is no other more moderate measure which would be equally suitable for dispelling the significant investor protection concerns.

It should be noted that the intended restriction is a more moderate measure than a total ban on the marketing, distribution and sale of CFDs to retail clients. Unlike a total ban, the intended restriction allows retail clients to continue to participate in CFD trading, but ensures that the significant investor protection concerns described are adequately limited.

Firstly, merely restricting the marketing, distribution and sale of CFDs to those CFDs that do not impose any obligation on retail clients to make additional payments (as set out by the BaFin General Administrative Act of 8 May 2017) can no longer be considered a measure of equal suitability. As already discussed in A. (II.), CFDs are generally marketed, distributed and sold electronically on online platforms, frequently in cross-border transactions. The majority of EU Member States and BaFin share ESMA’s view that comprehensive protection of retail clients against the risks of trading in CFDs requires that the national competent authorities of all Member States take their own steps, after the temporary ESMA Decision expires, to ensure the minimum level of investor protection established by ESMA. This means that national competent authorities in the majority of Member States have also taken such measures, which will apply in these Member States upon the expiry of the temporary ESMA Decision. If BaFin, in contrast, were merely to maintain the level of restriction of its General Administrative Act of 8 May 2017, banning only those CFDs that could require retail clients to make additional payments, there is a risk that the marketing, distribution and sale of CFDs would increase on the German market. This assumption aligns with the observation of a number of national competent authorities that CFD providers will resort to EU countries in which the marketing, distribution and sale of CFDs to retail clients are least regulated, or not regulated at all¹⁰³. Given the fact that – as evidenced by Decision (EU) 2018/796 of 22 May 2018 – ESMA has observed a rapid rise in the marketing, distribution and sale of CFDs to retail clients in the EU as a whole that is increasingly characterised by aggressive marketing techniques and a lack of transparent information, BaFin believes it is necessary to avert the possibility that CFD providers from countries in which CFD trading is more strictly regulated could evade restriction by operating in Germany after the ESMA Decision expires.

A more moderate measure that might be considered would be merely to increase the general information that CFD providers must give retail clients about the risks associated with CFD trading. However, by itself, this is not an equally suitable means of achieving the aim pursued. In particular, it would do nothing to change the very high rate of losses by retail clients recorded. In many cases, requiring more risk information would not have a direct impact; rather, it would only be effective after a certain delay, if at all. It is also doubtful whether the effects would reach all retail clients. After the temporary ESMA Decision in accordance with Art. 40 of MiFIR expires, it would leave many retail clients without protection once again, potentially in the long term. For these reasons, increasing the risk information that CFD providers must give retail clients must be rejected as a more moderate but equally suitable measure.

Moreover, a mere obligation to disclose generic profit and loss figures for CFD trades as part of a warning made to potential retail clients by CFD providers would not, in BaFin’s view, result in a satisfactory decrease in the observably large number of investors who invest in CFDs, and the resulting large number of CFD trades performed by these investors and losses incurred on these trades. In the course of ongoing market investigations, BaFin has found that CFD providers’ websites do contain risk warnings in German, or at least in English. In addition, virtually all providers warn of the risk of losing all of the invested capital. A clear majority of providers also warn that this financial instrument is highly speculative in nature. Prior to the entry into force of ESMA Decision (EU) 2018/796 on 2 July 2018, however, this had had no definitive impact on the large number of retail clients who invest in CFDs, the resulting large number of CFD trades performed, and the losses incurred on these trades. BaFin anticipates that even requiring the publication of generic profit and loss figures as provided for in the annex to this General Administrative Act, above and beyond the provision of generic risk warnings, would not be as suitable a means of reducing the number of CFD investors, the resulting large number of CFD trades performed by these investors, and the losses incurred on these trades (which were between 74% and 89% prior to ESMA Decision (EU) 2018/796) as would the risk warnings in the annex in conjunction with the additional restrictions in the notice contained in this General Administrative Act. Furthermore, it can also be expected that a substantial proportion of retail clients will fail to read even the obligatory risk warnings in the annex to this General Administrative Act, with the result that the obligatory dissemination of these risk warnings alone will not be sufficient to dispel the existing significant investor protection concerns. For these reasons, the mere obligation to provide risk warnings in accordance with the annex to the notice in this General Administrative Act for the purposes of warning retail clients does not, on its own, appear to be a suitable means of addressing the established significant investor protection concerns after the ESMA Decision in accordance with Art. 40 of MiFIR expires.

As shown in detail under A. (VI.) above, the national competent authorities of other EU Member States had already introduced a range of measures with regard to the marketing, distribution and sale of CFDs to retail clients before ESMA Decision (EU) 2018/796 was adopted on 22 May 2018. Inter alia, warnings were issued by IT-CONSOB (February 2017) and AT-FMA (January 2017). In addition, ESMA published its own warning about CFDs, binary options and other speculative products for the whole EU, i.e. also for Germany, on 25 July 2016¹⁰⁴. Another – similar – warning issued by BaFin in Germany would not be a suitable means of dispelling the significant investor protection concerns described above after the ESMA Decision in accordance with Art. 40 of MiFIR expires. As already stated, even providers’ extensive use of warnings on their websites about the risk of losing the entire investment had no effect on the persistently high rate of losses incurred by investors prior to the adoption of ESMA Decision (EU) 2018/796 on 22 May 2018.

Before Decision (EU) 2018/796 was adopted on 22 May 2018, ESMA, too, had evaluated less restrictive measures, such as an obligation to sell and distribute these products together with an advisory service. Due to their features and the associated high risks, however, the products the above notice serves to prohibit are, in any event, not suitable for retail clients. In particular, because it would only suppress existing activities, increased monitoring to ensure compliance with the product governance requirements of MiFID II would fail to stop retail clients from being offered financial products that are unsuitable for them, such as CFDs. In contrast, the restrictions contained herein are preventative in nature, and would thus prevent certain CFDs from being offered to retail clients. For this reason, too, increased monitoring to ensure compliance with the product governance requirements of MiFID II must be rejected as a less restrictive measure.

Furthermore, this General Administrative Act does not fully prohibit the marketing, distribution and sale of CFDs to retail clients. No. 2 of the notice provides for an exemption from the ban of those CFDs for which the significant investor protection concerns described have been dispelled.

3. Appropriateness

Restricting the marketing, distribution and sale of CFDs to retail clients to the extent described in the notice after the ESMA Decision in accordance with Art. 40 of MiFIR has expired is also appropriate.

It addresses the significant investor protection concerns described by making it possible to achieve a consistent and appropriate level of investor protection for retail clients trading in CFDs in Germany. It does not have a detrimental impact on the efficiency of financial markets, on providers or on investors that is disproportionate to its benefits.

The various legally protected rights in question are to be weighed up in an overview of all relevant interests.

In particular, pursuant to Art. 42(2)(c) of MiFIR, these considerations must take into account the scope and nature of the identified significant investor protection concerns, the level of sophistication of investors or market participants concerned and the likely effect of the action on investors and market participants.

As explained under B. (I.) (2.1), the calculation of the performance of CFDs is extremely complex and does not correspond to the level of sophistication typical of retail clients.

The discrepancy between the expected gains and the risk of loss in unrestricted CFD trading set out under B. (I.) (2.6) must also be considered. A clear majority of retail clients who invested in CFDs prior to the adoption of Decision (EU) 2018/796 lost their money on these trades. Before the BaFin General Administrative Act of 8 May 2017 was adopted, this risk was not even limited to the investor’s initial margin because of the obligation to make uncapped additional payments.

The public interest in restricting the marketing, distribution and sale of CFDs to retail clients to the extent described in the notice in this General Administrative Act outweighs the economic interest of affected CFD providers in marketing, distributing and selling CFDs subject to no restrictions, as well as the individual retail client’s interest in purchasing CFDs subject to no restrictions.

This General Administrative Act is detrimental to the economic interest of CFD providers in marketing, distributing and selling CFDs to retail clients. This General Administrative Act may cause impacted providers to suffer financial losses in the course of their business operations, and will ensure the continued obstruction of a resurgence of trading in products coming under the restriction, even after the temporary ESMA Decision in accordance with Art. 40 of MiFIR expires. No additional costs are anticipated in the implementation of the General Administrative Act, e.g. IT costs, costs for updating procedural and organisational rules or costs for the necessary review and amendment of existing contracts. The content of the intended restriction is equivalent to the rules already implemented by CFD providers as a result of the temporary ESMA Decision, and will uphold these after the Decision has expired. In effect, therefore, it has applied to CFD providers since 1 August 2018. It must also be remembered that no. 2 of the notice in this General Administrative Act exempts certain CFDs from the restriction and thus does not fully prohibit the marketing, distribution and sale of CFDs to retail clients. Furthermore, this General Administrative Act does not refer to options, futures, swaps or over-the-counter forward-rate agreements. Even the CFDs falling under the restriction in the notice in this General Administrative Act can still be distributed to professional investors within the meaning of Art. 4(1) no. 10 of MiFID II without restriction.

Moreover, a primary reason for the extensive regulation of the financial sector is the fact that it serves interests and objectives which are placed above those of individuals. Regulators place great value on investor protection. That is why special care is taken to ensure they are protected. Based on this valuation under the law, it should be possible to market, distribute or sell a financial instrument only where the product at least has the potential to serve these greater interests and objectives, and where it does not pose a disproportionate threat to the maintenance of a minimum level of investor protection. By participating in the capital market, the typical retail client is primarily pursuing the aim of capital accumulation. At its core, this is an act of saving or investing.

Before the restrictions in ESMA Decision (EU) 2018/796 came into force on 22 May 2018, CFD providers largely marketed, distributed and sold their products as speculative investment opportunities. In most cases, retail clients were made aware that their investment should be understood as risk capital by means of warnings issued by CFD providers about these products. CFDs were also marketed as a participation in capital markets due to being coupled with real underlying assets.

Even if, as claimed by one provider in the consultation procedure, the measures have led to significant price falls in the shares of listed European CFD brokers, this changes nothing with regards to the proportionality of the measure. In this respect, preserving the public interest by guaranteeing consumer protection takes precedence over individual interests, in this case, of shareholders. Even if, following the expiry of the ESMA Decision, permanent restrictions on the marketing, distribution and sale of CFDs to retail clients as a result of this supervisory measure were to lead to, or support, an adverse impact on the business success or business prospects of listed European CFD brokers with consequences for the share prices of such brokers, at most, this represents one of the typical economic risks faced by shareholders. The provisions of Article 42 (1) (a) of MiFIR enable BaFin to intervene via a restriction or ban on the marketing, distribution and sale of CFDs. The legislation providing for such intervention was introduced in the knowledge that this may have negative economic consequences for the providers affected, and possibly therefore also indirect negative economic consequences for others, e.g. shareholders. The legislation has knowingly accepted these potential consequences in the interests of improved consumer protection. In the legislative assessment, the financial interests of providers and their shareholders rank below the interests of retail client protection.

However, the significant investor protection concerns set out above make it patently clear that it will generally be very difficult for retail clients to identify the risks associated with CFDs and make a sufficiently sound assessment of the potential performance of their investment.

For these reasons, the economic interest of CFD providers in the unrestricted distribution of CFDs to retail clients appears to be less deserving of protection than the public interest in collective investor protection, and must be made secondary to it due to the significant investor protection concerns described.

The anticipated effects of the restriction on other market participants are also proportionate.

This Administrative Act affects a limited target group. Any effect by this Administrative Act on the financial sector as a whole can be ruled out on the mere basis that there have been no such effects during the time the ESMA Decision has been in force. An equivalent restriction on the marketing, distribution and sale of CFDs to that in this General Administrative Act has already existed during this period. No relevant effects have been observed in Germany or the EU during this time. It is therefore possible to rule out any significant impact by this General Administrative Act on the financial sector as a whole. This General Administrative Act merely retains and upholds the legal conditions that have existed since ESMA Decision (EU) 2018/796 came into force on 1 August 2018. There is little interdependence between the CFD market and other capital markets, and its impact on stock exchange trading is minimal.

The effects of the restriction on retail clients are also proportionate.

It must be taken into consideration that the restriction on the marketing, distribution and sale of CFDs will be detrimental to retail clients’ legitimate interest in exercising their private autonomy and deciding for themselves whether or not to purchase CFDs with an additional payments obligation and higher leverage (than that permitted in the notice above) on the basis of their individual personal and financial situations. This autonomy is already restricted by the temporary ESMA Decision, and will remain so after this measure expires by virtue of the restriction issued with this General Administrative Act, which limits the options of individual retail clients. With respect to retail clients on the whole, however, the restriction imposed through the ban issued by this General Administrative Act is proportionate.

The public interest in the maintenance of investor protection outweighs the interest of individual retail clients in trading in those CFDs not excluded from the ban in the notice. Individual retail clients are not fully denied access to CFDs. The marketing, distribution and sale of those CFDs excluded from the ban under no. 2 of the notice are still defensible in keeping with investor protection because these CFDs do not generate most of the significant concerns described.

The additional burden of complying with the restrictions may cause an increase in product costs that could potentially be passed on to the investor, but any product intervention will necessarily lead to some limitation or alteration of the possibilities for investment. In addition, there is no right to low-cost securities trades, and particularly not to low-cost possibilities for speculation with the help of such securities trades. EU legislators were aware when implementing Art. 42 of MiFIR that a product intervention could have such consequences. In any event, the aim of the newly introduced Art. 42 of MiFIR was to give national competent authorities, including BaFin, the option to intervene where significant investor protection concerns arise.

The conditions for exemption pursuant to no. 2 of the notice are also appropriate, as they ensure an appropriate balance between the relevant interests of providers and individual retail clients on the one hand, and the public interest in collective investor protection on the other hand. In BaFin’s opinion, the following specific advantages outweigh any impediment to the interests of CFD providers and retail clients.

a) Initial margin protection

Imposing specific leverage limits that depend on the characteristics of the underlying assets serves to protect retail clients by requiring them to supply a minimum initial margin in order to conclude a CFD. This requirement is known as “initial margin protection”. It limits the client’s notional investment exposure in relation to the amount of money invested. As the costs incurred by clients increase with their notional investment exposure, initial margin protection will reduce the probability of client losses compared to those that would be expected if the client were to trade at higher leverage.¹⁰⁵ As explained in more detail below, empirical academic research corroborates this reasoning and establishes that leverage limits improve average outcomes for investors¹⁰⁶. Research by Rawley Z. Heimer and Alp Simsek indicates that lower leverage is associated with improved client outcomes, including lower losses per trade and lower total transaction fees as a function of lower trading volumes. In particular, their research comparing client outcomes before and after the application of leverage limits in the US market concludes that leverage limits improved outcomes for the highest-leveraged clients by 18% per month and alleviated their losses by 40%. This has demonstrated a positive relationship between lower leverage and lower trading volumes.

In addition, requiring minimum initial margin will address some of the risks relating to CFDs for retail clients by ensuring that only those who are capable of posting sufficiently high margin can trade in these products¹⁰⁷.

By the same token, initial margin protection is also expected to decrease the likelihood that CFD providers will target smaller accounts in the retail client mass market supported by higher leverage. Investment firms will likely find themselves incentivised to focus on professional clients instead of continuously generating fresh retail client turnover. It can be expected that initial margin protection will contribute to shifting the focus of CFD providers towards working in the best interests of their clients, and not seeking primarily to continuously attract new clients or to increase their market share.

In particular, for unhedged CFD trades for which the provider profits from the client’s losses directly, initial margin protection will contribute to mitigating the risk of potential conflicts of interest. This is because it will reduce the risk of firms profiting from trades on which the client loses, and from their expected gains on those trades. In addition, initial margin protection reflects a conventional approach to investor protection taken by a number of other countries outside the EU¹⁰⁸.

EMSA has set the initial margin protection for each underlying according to the volatility of that underlying using a simulation model to assess the likelihood of a client losing 50% of their initial investment over an appropriate holding period¹⁰⁹. Specifically, ESMA performed a quantitative simulation of the distribution of returns an investor in a single CFD might expect to receive at different leverage levels. The basis for the simulation was approximately 10 years of daily market price data (in most cases) for different types of underlying commonly used in CFDs sold to retail clients¹¹⁰. For the purposes of the analysis, ESMA considered CFDs that are automatically closed out if the margin reaches 50% of its initial value. The simulated probability with which closeout occurs depends on the given leverage, and increases with it. A metric examined was the probability of (automatic) closeout as a function of leverage. This metric allows for leverage limits to be set according to a model that is expected to mitigate detriment on a consistent basis across different types of underlying.

BaFin shares ESMA’s view that, given the statistics on the distributions of CFD holding periods (using data collected by national competent authorities and transferred to ESMA),¹¹¹ it would be appropriate to set initial margin protection for retail clients by assuming that they hold an asset for at least 1 day. To provide a consistent reference point, ESMA proceeded to simulate what degree of leverage would lead to margin closeout with a 5% probability, for different underlying assets. The range of results within each asset class was then used to inform the selection of leverage limits. In setting the limits, how widely the various assets were traded was also considered. For example, among CFDs on commodities, oil and gold are both commonly traded by retail clients, but simulations indicate that the leverage implying a 5% probability of margin closeout for CFDs in gold is around twice that of CFDs in oil. Accordingly, the leverage limit for CFDs in gold is different from the leverage limit for CFDs in oil or other commodities. Determining initial margin protection in this way, in particular through simulated positions lasting at least 1 day, ensures a consistent level of necessary protection for retail clients. In this way, retail clients who may not actively monitor their position over the course of a trading day, or who may not be able to assess the need for a quick reaction in light of the volatility of the underlying market, are as well protected as possible. In the case of CFDs on equities, the data collected by ESMA suggests that holding periods are typically longer than for other assets, and holding periods of up to 5 days were therefore considered.

An alternative means of achieving initial margin protection might be to set a single leverage limit for all CFDs irrespective of their underlying. However, it seems more appropriate to distinguish between underlying types given the differences in historic price volatility between the various classes of underlying, and given the differences in typical fee structures within the current CFD provider population¹¹² and typical client behaviour. A common leverage limit for all providers and types of underlying would result in more severe restrictions for some products than the varying leverage limits proposed by this General Administrative Act.

The leverage limits pursuant to 2. (a) of the above General Administrative Act are appropriate, and are not overly restrictive or complicated, as is claimed by the two involved parties. The proposal by one involved party to restrict leverage to just two levels (2% of the notional value of the CFD for non-equities, and 10% of the notional value of the CFD for equities) is inadequate and inappropriate in light of significant investor protection concerns. Such high leverage would not adequately limit an excessive number of risks. The opinion expressed in one submission, that it is “inconsistent” to categorise German government bonds as more volatile than commodities such as oil or wheat, or market indices such as the DAX, does not take full account of the circumstances. BaFin has the authority to create its own category types at its own discretion, providing these groupings are not arbitrary. As explained in detail above, the basis for the creation of category types for leverage limits was: simulations for each underlying with constant specifications, namely that retail clients hold an investment for at least one day (for equity CFDs for five days); the leverage on this investment that would lead to margin closeout with a probability of 5%; and the extent of trading in the various investments. Moreover, this basis is not called into question by the involved parties. The creation of categories on this basis resulted in a leverage limit for German government bonds (among others) pursuant to 2. (a) (ee) (2) of this General Administrative Act of 20% of the notional value of the CFD, but for other investments – including the DAX 30 – to a leverage limit of 5% pursuant to 2. (a) (bb) (1) of this General Administrative Act.

The submission of the involved party does not challenge the necessity of introducing a very restricted number of leverage limits. However, the prerequisite for achieving this is to include as high a number of investments as possible in a single product category. The product category for government bonds includes not just the German government bonds cited by the involved party, but also the government bonds of other countries. Risk assessment for government bonds often fluctuates significantly over short periods of time as a result of unforeseen circumstances such as political events, and accordingly so does the performance or price of government bonds. If government bonds or the countries issuing government bonds were allocated to different sub-categories, the make-up of these sub-categories would be subject to constant and significant fluctuations. This would potentially make it necessary to constantly adjust the leverage limits in this General Administrative Act. It is already appropriate on the grounds of the legal certainty and precision of the limitations set by this General Administrative Act, that the leverage for government bonds (among others) pursuant to 2. (a) (ee) (2) of this General Administrative Act be set at 20% of the notional value of the CFD, and thus above the 5% leverage limit pursuant to no. 2. (a) (bb) (1).

Furthermore, it cannot be excluded that retail clients may migrate from providers subject to supervision within the EU to providers outside of the EU (partly) in order to evade the leverage limits in the notice. However, this does not mean that this measure and its prescribed leverage limits are therefore inappropriate. As already explained in section B. above, after the expiry of the ESMA Decision, an EU-wide restriction on the marketing, distribution and sale of CFDs will only result from this General Administrative Act if certain conditions are fulfilled. If the individual national competent authorities of each of the other EU Member States do not implement comparable national measures within their own remit that are comparable to this BaFin General Administrative Act, clients may potentially migrate within the EU to evade restrictions. BaFin can only implement measures for the area in which it is the national competent authority. The potential migration of clients to providers in areas where BaFin is not the national competent authority in order to evade restrictions cannot be the grounds for renouncing the required supervisory measures. Evasive behaviour could only be prevented by uniform and agreed global supervisory measures.

The categorisation of clients as professional or retail clients is specified by European legislation (Article 4(1) nos. 10 and 11 of MiFID II). The suggestion to introduce an additional investor category of “experienced retail client” within the existing retail client category defined by Article 4(1) no.11 of MiFID II, and to allow this “experienced retail client” to trade with higher leverage, would require an amendment or addendum to the relevant rule to enable a sufficiently quantifiable EU-wide definition of the category of persons covered.

The initial margin protection in the notice for retail clients is therefore appropriate, even taking into account submissions made during the consultation procedure.

b) Margin closeout protection

Another component of the restriction meant to protect retail clients is margin closeout protection. This serves to complement the introduction of initial margin protection and further reduce the risk of retail clients losing significantly more than they have invested in a CFD under normal market conditions.

Furthermore, the provision of margin closeout protection and the standardisation of the percentage at which CFD providers are required to close out a retail client’s open CFD (50% of the initial margin required) is also designed to harmonise the inconsistent margin closeout practices of CFD providers. Before its Decision (EU) 2018/796 was adopted, ESMA had observed that the level at which automatic margin closeout is applied is inconsistent across CFD providers. On the basis of reports by BaFin, CZ-CBN and BG-FSC, ESMA determined that for clients generally trading with low transaction amounts, some CFD providers had set the margin closeout level at between 15% and 50% of the margin required to open a CFD¹¹³. When providers allow clients’ margins to be eroded to as low as 15% of the initial margin required, they place clients at risk of losing more money than they originally deposited, particularly in the event of gapping. Conversely, an excessively high margin closeout level would put clients at risk of being frequently closed out, which might not be in their interest. The 50% threshold set out in the ESMA Decision reduces the risk of substantial losses by retail clients, and is therefore a suitable means to help diminish the significant investor protection concerns that CFDs generate for these clients.

As reflected in its Decision (EU) 2018/796, ESMA conducted an analysis of the results achieved for investors where a margin closeout rule was applied per position versus where a margin closeout rule was applied per CFD trading account. Where a margin closeout rule was applied per position, a CFD would be closed out when its value fell below 50% of the value of the initial margin. Where a margin closeout rule was applied per CFD trading account, a CFD would be closed out when the value of all open CFDs on the account plus all of the funds in the account fell to less than 50% of the total value of the initial margin for all of the open CFDs. In particular, ESMA assessed the frequency of closeout and its impact on the size of client losses for a simulated portfolio of CFD positions under each scenario. Because the range of possible investor portfolios is extremely wide and varied, the analysis considered whether one of these methods led to better outcomes for investors in general. The broad conclusion was that obtaining a better outcome for the investor depends on how the prices of the underlying assets of the CFDs in the portfolio change, whether for margin closeout of individual positions or per account. After a closeout, the price of an underlying asset may increase or decrease. This makes a difference if closeout only occurs in 1 of the 2 cases (position-based or account-based).

In general, closeout is expected to happen slightly more frequently on a position basis than on an account basis, assuming identical investor portfolios. However, due to the initial margin protection, closeout is expected to be rare on either basis. For clients with a single position in their CFD trading account, there would be no difference between the account basis and the position basis. ESMA’s analysis in Decision (EU) 2018/796 shows that there are many retail CFD trading accounts containing only a single position.

While the difference in outcomes resulting from the per-position basis versus the per-account basis is expected to be small for many investors, the findings of ESMA’s analysis highlighted additional reasons why the account basis may be better for some of them. Firstly, in allowing gains from one position to offset losses from another, this basis fosters a diverse portfolio of investments. Secondly, to the extent closeout happens less frequently on an account basis, it reduces the scope for investors to bear costs arising from re-entering positions.

In light of the findings of the aforementioned ESMA analysis, a standard margin closeout rule of 50% of the required initial margin is proportionate as a minimum level of protection to apply as described in no. 2. (b) of the notice in this General Administrative Act. In particular, this rule is meant to provide for closeout of one or more CFDs on the terms most favourable to the retail client to ensure that the funds in the retail client’s trading account amount to at least 50% of the total protective minimum initial margin paid to enter into all open CFDs at any point in time. As already explained, the value of a trading account should include the funds in that account together with any unrealised net profits from open CFDs connected to the account.

Margin closeout protection does not prevent a provider from applying a per-position closeout rule at 50% of the initial margin requirement of the specific position, as opposed to a per-account closeout rule. If a provider applies a 50% closeout rule, they will inevitably adhere to it for all accounts, as any single position will be closed out in accordance with this 50% closeout rule.

In view of all this, margin closeout protection presents itself as a proportionate means of restricting the marketing, distribution and sale of CFDs to retail clients.

c) Negative balance protection

The aim of negative balance protection is to protect retail clients in exceptional market conditions. In particular, such conditions can be thought to exist when there is an unexpected fluctuation in the price of the underlying asset of such magnitude that the CFD provider is prevented from closing out the position in accordance with the level of margin closeout protection. In addition, the fluctuation must produce a negative balance on the retail client’s account.

In other words, major market events can cause gapping, preventing the automatic margin closeout protection from being effective. Prior to the adoption of its General Administrative Act of 8 May 2017, BaFin had observed that some investors lost more money than they had invested due to the Swiss National Bank’s decision to unpeg the Swiss franc from the euro. Before the ESMA Decision, a number of national competent authorities had observed that, following events of this kind, clients owed considerably more than they had invested, and were left with a negative balance on their CFD trading accounts¹¹⁴.

The purpose of negative balance protection is to ensure that a retail client’s maximum losses from trading CFDs, including all related costs, are limited to the total funds allocated for CFD trading in the retail client’s CFD trading account. This also includes any funds yet to be paid into that account due to net profits on the closure of open CFDs on the account. Thus, the negative balance protection in this new BaFin General Administrative Act corresponds to the ban on the additional payments obligation in the General Administrative Act of 8 May 2017.

Retail clients should not incur any additional liability connected with their CFD trading activities. Other accounts should not make up any part of the capital at risk. If a trading account also includes other financial instruments (e.g. UCITS or shares), only the retail client’s funds explicitly dedicated to CFD trading, and not those dedicated to other financial instruments, will be at risk.

In this way, negative balance protection also provides a kind of ‘safety net’ in extreme market conditions.

As reflected in its Decision (EU) 2018/796, ESMA also conducted an analysis of the Swiss franc event of January 2015 to consider its direct impact on investors across a range of scenarios¹¹⁵. These scenarios were the following:

(1)protection against any negative balance on a CFD trading account held by a retail client;

(2) protection against any negative balance on each CFD position held by a retail client; and

(3)no negative balance protection.

In assessing these scenarios, ESMA noted that the direct impact on investors resulting from the different options in the case of extreme market events needed to be weighed against the ongoing costs of providing this protection. In particular, CFD providers would face ongoing costs attributable to additional capital requirements or hedging, as part of their risk management. A portion of these costs could in turn be passed on to investors in the form of higher spreads or other charges. BaFin is in agreement with these observations by ESMA.

At the same time, without negative balance protection there is the risk of significant detriment for consumers. A retail client could end up owing a firm more money than they originally invested as a result of extreme market conditions. This type of situation is especially detrimental to retail clients with no appreciable liquid assets¹¹⁶. It is therefore appropriate to require negative balance protection per CFD trading account in order to address this source of potential significant detriment while minimising the associated costs to firms and retail clients. Requiring negative balance protection per individual CFD (on a per-position basis) would risk imposing disproportionate costs on retail clients and firms. If negative balance protection per position were introduced, CFD providers would have to forgive any losses by the retail client in excess of the funds dedicated to the relevant position, which include the initial margin and any voluntary additional margin paid by the retail client. As negative balance protection would not permit the netting of a significant loss with other positions in a retail client’s portfolio, a per-position rule would increase the market risk assumed by CFD providers. This would probably result in an increase in the capital requirements of CFD providers, the cost of which would likely be passed on to retail clients.

Negative balance protection dispels the significant investor protection concerns generated by obliging retail clients to make additional payments, and is proportionate.

d) Risk warnings

In the risk warnings published by CFD providers prior to the adoption of ESMA Decision (EU) 2018/796, the danger of rapid losses potentially exceeding the retail client’s invested funds was virtually never clearly explained. In some cases, the content of the warnings was clouded by the way they were presented or diluted with statements about potential gains. A study funded inter alia by UK-FCA found that a standardised risk warning significantly improved retail clients’ understanding of the product, including the possibility of losing more money than they had invested and the likelihood of making a profit¹¹⁷. This is not enough to enable an adequate assessment of all the risks of CFDs, especially the investor protection risks mitigated by the General Administrative Act. However, the findings confirm that risk warnings constitute a suitable contribution to better informing retail clients about CFDs.

The requirement in the annex to this General Administrative Act to disclose the percentage of retail client accounts that have registered losses is expected to counteract the tendency observed prior to the adoption of ESMA Decision (EU) 2018/796 for CFD providers to place greater emphasis on the potential profits for retail clients than on the losses actually incurred. Furthermore, the warnings are expected to support retail clients in making an informed decision about whether they wish to proceed with a high-risk product that is more likely to result in a loss than a gain.

The provisions of no. 2. (e) of the notice and the annex to this General Administrative Act require all CFD providers to tell retail clients what percentage of their retail client CFD trading accounts lost money over the last 12 months, and to warn them of the risk of losses associated with investing in CFDs. To keep this figure up to date, CFD providers must recalculate it each quarter. The percentage indicated must be presented in a simple and clear manner as part of a risk warning included in every communication from the provider.

CFD providers must take both realised and unrealised profits and losses into account when determining whether a retail client account has lost money. Realised profits and losses are based on all retail client CFD positions with the CFD provider that were closed during the calculation period. Unrealised profits and losses are based on the value of retail client positions still open at the end of the calculation period. In order to provide a complete picture of the percentage of retail client accounts that showed a profit or loss, when making the calculation, CFD providers must take into account all costs linked to trading CFDs.

For newly established CFD providers and CFD providers that have not had any open retail client CFD positions in the past 12 months, it will not be possible to calculate such a percentage for the last 12 months. These CFD providers are therefore required, pursuant to the annex to this General Administrative Act, to disclose to retail clients the losses resulting from retail client CFD trading recorded by Member States’ national competent authorities in the studies indicated.

The calculations required of these firms under this General Administrative Act are necessary in order to appropriately warn retail clients about the risk of losses, even if they are more labour-intensive for CFD providers than generic risk warnings. Prior to the adoption of its Decision (EU) 2018/796, ESMA considered the possibility of requiring a generic risk warning stating only the risk that retail clients may lose money rapidly due to the leverage of CFDs, or a more specific risk warning based on average losses for retail clients drawn from studies by national competent authorities. ESMA discarded the former option because it did not effectively draw retail clients’ attention to the real risk associated specifically with CFD trading by retail clients, and because it did not account for any special circumstances (e.g. firms that only offer certain kinds of CFD).

If the terms of agreement between CFD providers and third-party product distributors restrict the number of characters for notifications so that it is not possible to use abbreviated standard risk warnings pursuant to section C or F of the Annex to this General Administrative Act, CFD providers may instead use reduced character standard risk warnings pursuant to sections D or G of the Annex to this General Administrative Act.

e) Ban on monetary and non-monetary benefits

Another component of the restriction imposed to mitigate the risks relating to the distribution of CFDs to retail clients is a ban on monetary benefits (e.g. trading bonuses) and certain types of non-monetary benefits. Advertising offering retail clients bonuses or other (financial) incentives to trade CFDs often distracts them from the high-risk nature of CFDs. It attracts retail clients who might not otherwise choose to invest in these products, or who would be less likely to do so. Such benefits are often contingent on retail clients depositing money in their trading account, or on them executing a certain volume of trades.

However, the ban does not extend to information and research tools (e.g. analytics tools, access to markets/real-time listings, tutorials, etc.) provided to retail clients insofar as the tools relate to CFDs, as they can aid retail clients in their decision-making.

III. No discriminatory effect (Article 42(2)(e) of MiFIR)

This General Administrative Act has no discriminatory effect on services or activities performed from within another Member State.

IV. No serious threat to the physical agricultural market (Article 42(2)(f) of MiFIR)

Where a financial instrument or activity or practice poses a serious threat to the orderly functioning and integrity of the physical agricultural market, Art. 42(2)(f) of MiFIR requires that the public bodies competent for the oversight, administration and regulation of physical agricultural markets under Regulation (EC) No 1234/2007 be appropriately consulted prior to any product intervention by BaFin.

Before Decision (EU) 2018/796 of 22 May 2018 was adopted, ESMA consulted the public bodies competent for the oversight, administration and regulation of physical agricultural markets under Council Regulation (EC) No 1234/2007. ESMA received responses from the Bundesministerium für Ernährung und Landwirtschaft (Germany), the Ministry of Agriculture (Latvia) and the Ministry of Agriculture and Forestry (Finland). All bodies consulted reported no objection to the measure proposed by ESMA to restrict the marketing, distribution and sale of CFDs to retail clients throughout the EU¹¹⁸. In force from 1 August 2018 to 31 October 2018, ESMA Decision (EU) 2018/796 of 22 May 2018 included restrictions for that period largely equivalent in scope to those contained in this General Administrative Act. In introducing a “reduced character risk warning” for use in lieu of an “abbreviated standard risk warning”, ESMA Decision (EU) 2018/1636 of 23 October 2018 renewing and amending Decision (EU) 2018/796 changed the measure only slightly with regard to the specific formal requirements for risk warnings. There were no changes in the second renewal Decision (EU) 2019/155 of 23 January 2019 or the third renewal Decision (EU) 2019/679 of 17 April 2019 versus ESMA Decision (EU) 2018/1636. Beyond the “prohibition of participating in circumvention activities” in Article 3 of ESMA Decision (EU) 2018/1636 of 23 October 2018 renewing and amending Decision (EU) 2018/796 and the exception for the reduced character risk warning, the notice in this General Administrative Act corresponds to the restrictions imposed by ESMA In ESMA Decisions (EU) 2018/1636 of 23 October 2018 and 2019/155 of 23 January 2019, as well as 2019/679 of 17 April 2019. For this reason alone, no objections to this General Administrative Act are anticipated. Furthermore, BaFin has not become aware of any facts that would indicate the existence of a serious threat to the orderly functioning and integrity of the physical agricultural market.

In BaFin’s view, in the absence of any such facts, it can be assumed that no threat to the orderly functioning and integrity of the physical agricultural market exists. As there continues to be no evident reason for any such threat, no objections are expected from the public bodies competent for the oversight, administration and regulation of physical agricultural markets under Regulation (EC) No 1234/2007 and no consultation pursuant to Art. 42(2)(f) of MiFIR is required.

V. No notice period required

No notice period must be granted.

As already explained under B. (IV.), in the period prior to this General Administrative Act from 1 August 2018 until the General Administrative Act came into force, an obligatory restriction for providers was already in place that is equivalent to the content of this General Administrative Act.

Thus, as of 1 August 2018, the ESMA Decision already fully encompassed the restriction imposed by this BaFin General Administrative Act and was in force (inter alia) in Germany, as an EU Member State. Providers in Germany (too) were therefore already required to implement the ESMA restriction during the period from 1 August 2018 until the expiration of the ESMA Decision. Furthermore, CFD providers were already required to comply with the ban on the marketing, distribution and sale of CFDs with an additional payments obligation to retail clients before BaFin’s General Administrative Act came into force, from 8 May 2017 until 31 October 2018 (expiration of ESMA Decision (EU) 2018/796).

BaFin therefore believes it is possible for CFD providers to comply with the restrictions pronounced with this General Administrative Act without being granted a notice period.

Comments:

This General Administrative Act shall be published in accordance with Art. 42(5) of MiFIR.

Pursuant to section 15 (2) of the WpHG, objections to and appeals against measures under Art. 42 of MiFIR shall have no postponing effect.

I would like to point out that, pursuant to section 120 (9) no. 30 of the WpHG, an administrative offence is deemed to be committed by any party who, wilfully or negligently, fails to comply with an enforceable order under Art. 42(1) of MiFIR.

Instruction on legal remedies:

An objection may be lodged against this General Administrative Act with the Federal Financial Supervisory Authority in Bonn or Frankfurt am Main within one month of its announcement.

Elisabeth Roegele

ANNEX

RISK WARNINGS

SECTION A

Risk warning conditions

1. The risk warning shall always be presented in such a way that it is prominently displayed and recognisable to retail clients. The font size of the risk warning shall be at least equal to the predominant font size and in the same language as that used in the communication or other type of published information.
2. If the communication or published information is in a durable medium within the meaning of section 2 (43) of the WpHG or on a webpage, the risk warning shall be in the format specified in section B.
3. In the cases not covered by no. 2, the risk warning shall be in the format specified in section C.
4. When using the format of section B or C, if the number of characters in the risk warning exceeds the number of characters prescribed in the general terms and conditions of an external distributor, the format prescribed for the risk warning in section D may be used, in derogation of 2. and 3. above.
5. If the format prescribed for the risk warning in section D is used, the notification or published information must also include a link to the manufacturer’s webpage where the risk warning in accordance with the requirements of section B can be found.
   
6. The risk warning shall include an up-to-date loss percentage for the relevant CFD provider. This loss percentage shall reflect the percentage of CFD trading accounts provided to retail clients by the CFD provider that lost money due to CFD trading. This calculation shall be performed every 3 months and cover the 12-month period preceding the date on which it is performed, including that date (“12-month calculation period”). The loss percentage shall be calculated as follows:
   a. An individual retail client CFD trading account shall be considered to have lost money if the sum of all realised and unrealised net profits on CFDs during the 12-month calculation period is negative.
   b. Furthermore, any costs relating to the CFD trading account shall be included in the calculation, including all charges, fees and commissions.
   c. The following items shall be excluded from the calculation:
   (1) any CFD trading account that had no connection to an open CFD within the calculation period;
   (2) any profits or losses from products other than CFDs connected to the CFD trading account;
   (3) any deposits or withdrawals of funds on or from the CFD trading account.
7. By way of derogation from nos. 2 to 6, if in the last 12-month calculation period a CFD provider has not provided an open CFD for a retail client CFD trading account, that CFD provider shall use the standard risk warning specified in sections E to G, as appropriate. The format specified in section E shall be used for information published in a durable medium within the meaning of section 2 (43) of the WpHG or on a webpage; in all other cases, the format specified in section F shall be used. If the format prescribed for the risk warning in section G is used, the notification or published information must also include a link to the manufacturer’s webpage where the risk warning in accordance with the requirements of section E can be found.
8. By way of derogation from nos. 2 to 4, if in the last 12-month calculation period a CFD provider has not provided an open CFD for a retail client CFD trading account, that CFD provider shall use the standard risk warning specified in sections D and E, as appropriate. The format specified in section D shall be used for information published in a durable medium within the meaning of section 2 (43) of the WpHG or on a webpage; in all other cases, the format specified in section E shall be used.

SECTION B

Durable medium and webpage provider-specific risk warning

CFDs are complex instruments and entail a high risk of losing money rapidly due to leverage.

[insert percentage per provider]% of retail investor accounts lose money when trading CFDs with this provider.

You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

SECTION C

Abbreviated provider-specific risk warning

[insert percentage per provider]% of retail investor accounts lose money when trading CFDs with this provider.

You should consider whether you can afford to take the high risk of losing your money.

SECTION D

Reduced character risk warning

[insert percentage per provider]% of retail investor accounts lose money.

SECTION E

Durable medium and webpage standard risk warning

CFDs are complex instruments and entail a high risk of losing money rapidly due to leverage.

Between 74% and 89% of retail investor accounts lose money when trading CFDs.

You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

SECTION F

Abbreviated standard risk warning

Between 74% and 89% of retail investor accounts lose money when trading CFDs.

You should consider whether you can afford to take the high risk of losing your money.

SECTION G

Reduced character standard risk warning

Between 74% and 89% of retail investor accounts lose money.

Footnotes: