Will German regulators treat trading as gambling?

June 4, 2017

There has been a wave of regulation reform across Europe targeting the Forex, CFD and binary options markets. Germany has not been left behind in the wave, and they too have repealed the regulations governing leveraged CFD products. These include Forex pairs, commodities and even stocks.

What are these new regulations?

Back in early December 2016, several European financial regulators made changes to the financial regulations. And Germany’s financial regulator, the German Federal Financial Supervisory Authority, or Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), did so too. In a proposal sent to CFD product providers, BaFin outlined the change they would like to make.

In the proposal, BaFin required that all brokers soliciting German clients provide them with negative balance protection. Even though the regulator does not see any leveraged products as gambling, it still requires some extra assurance. As stated at , this safety net effectively prevents a client’s account balance from going below zero and having them owe the broker money. This has happened in the past during volatile moments, like back in 2015 when the Swiss National bank de-pegged its currency from the euro.

German regulators

During times like this, orders are not filled at the desired price because the market prices are moving so fast. It makes closing of open positions difficult due to slippage and stop loss orders don’t work either. As for margin calls, it’s often too late for a trader to deposit money before their entire account balance is wiped out. Worse, the losses can exceed the invested capital, leaving the trader in the red.

To protect their residents against this, requires that all providers of CFD products apply negative balance protection. With this, an investor’s account can only drop to zero but won’t exceed their invested capital.

How did the brokers react?

Within the proposal, the brokers had up to the 20th of January this year to raise any issues, but there were none, and the rule go into effect in August. When some of the brokers were interviewed regarding the new regulations, they expressed relief. Compared to other EU nations, BaFin’s changes in regulations were termed as ‘mild’.

Belgium has completely banned trading the Forex market and other decentralized CFDs. The FCA had previously banned trading bonuses and capped leverage at 50:1. Meanwhile, France and Netherlands have banned the advertising of CFD products.

When compared to other regulators’ interventions, BaFin’s actions have been seen as mild and, therefore, not as threatening to the brokers’ business.

How are German regulators treating trading?

There is obviously a lot of concern from BaFin about how many traders participating in the markets are losing compared to those that are winning. The most recent change on negative balance protection is an attempt to protect their citizens from losing more than they have.

Interesting, though, is that they have not taken any punitive measures that would otherwise cripple trading operations. Instead it seems that they are more interested in protecting their people rather than stop the industry. This is a sign of confidence in the industry as a whole, and we don’t expect any further restrictive policies coming into effect soon.

So far, Forex trading is still being considered as an investment rather than a gamble, and that is positive news for everyone in the business.