German financial regulator Bafin announced its intention to add more red tape on spread betting by limiting the marketing, distribution and sale of one of the most popular betting products, contracts for difference (CFDs).
CFDs are a form of derivative trading for investors to speculate on the performance of underlying instruments such as indices, shares, commodities, currency pairs or interest rates. Positive and negative price changes of these underlying instruments are mirrored by the CFD.
Unlike direct investments, CFDs are only require a small amount of capital investment. CFDs are categorised as leveraged products as they are traded on margin, allowing investors to gain a large exposure to a financial market while only tying up a relatively small amount of capital – magnifying the scope for both gains and losses.
Bafin believes that the risk of loss for investors trading CFDs cannot be limited effectively through the margin call process or through stop-loss orders.
The watchdog is concerned that price fluctuations in the CFD market can occur at a pace that does not give sufficient time to ask the investor for an additional payment on top of the margin they have deposited (margin call).
“In such instances, the investor’s position will be forcibly closed, sometimes resulting in very significant losses,” Baffin said in a statement on the matter.
Stop-loss orders are also not considered to be a reliable way for investors to protect themselves from large losses, the regulator said. “This is because the next available price at which such an order is normally executed may differ significantly from the price originally strived for. The difference to be paid by the investor can then amount to multiples of the margin they have put down.”
The announcement comes 2 days after the UK’s Financial conduct Authority laid out to similar plans.
“In the case of CFDs with an additional payments obligation, the risk of loss for the investor is incalculable,” said chief executive director, Elisabeth Roegele. “For consumer protection reasons, we cannot accept that.”