In order to protect HNW investors from sharp practice, the German Federal Financial Supervisory Authority (the Bundesanstalt für Finanzdienstleistungsaufsicht or BaFin) intends to limit the marketing, distribution and sale of financial contracts for difference.

The upshot of this will be that nobody will be able to offer contracts with an additional payments obligation to retail clients.

BaFin's 'investor protection' concerns in relation to CFDs with an additional payments obligation for retail clients are as follows. If the difference to be paid by the retail client exceeds the capital he has invested, he must pay the shortfall from his other assets. BaFin is now of the view that the risk of loss for the investor cannot be limited effectively through the margin call process or through stop-loss orders. In the words of chief executive director Elisabeth Roegele, "we cannot accept that."

An 'underlying' asset may fluctuate in price very widely from second to second. So much so, the CFD provider often does not have enough time to ask the investor for an additional payment on top of the margin he has deposited (the margin call). In such instances, the investor's position is closed forcibly and he sometimes makes very significant losses. Neither are stop-loss orders a reliable way for investors to protect themselves from large losses. This is because the next available price at which such an order is normally executed may differ significantly from the price for which the investor was striving originally. The difference to be paid by the investor can then amount to multiples of the margin they have put down.

With financial CFDs, HNW investors speculate on the performance of underlying instruments such as indices, shares, commodities, currency pairs or interest rates. Compared with a direct investment, the capital they invest is small. The CFD missors positive and negative price changes. If the deviation is positive, the investor receives the difference amount; if the deviation is negative, they must pay the difference.

In the summer, the European Union's Securities and Markets Authority issued a warning to investors about CFDs, which appears to have supplied BaFin with the motivation to push for this clampdown. CFDs came to the public's attention primarily as a result of the "Swiss Franc shock" at the beginning of 2015, when the Swiss National Bank abandoned the cap on the Swiss franc's value against the euro and many CFD investors suffered major losses as a result of having to subsequently make additional payments. Huge currency fluctuations are even more likely in the future.

BaFin has published the planned measure pursuant to s4b Securities Trading Act (Wertpapierhandelsgesetz – WpHG) on its website. Comments may be submitted in writing until 20 January 2017.