Further restrictions of brokers in Germany - for the safety of retail clients

Investment firms will not be allowed to charge retail clients more fees than the assets they have invested. Clients will only be able to enter into futures to hedge positions and futures will only be traded to clear or close existing futures positions that were purchased prior to the entry into force of the new law.

Its introduction is planned for January 1, 2023. In practice, this means significant restrictions on the introduction to trading, distribution and sale of futures contracts for individual clients. But the brokers themselves are to blame.

When concluding a transaction on a futures contract, we should have a security that allows to close a given position on the next trading day, and any resulting losses will be covered by the security deposited. The higher the risk or volatility of the underlying instrument in a futures contract, the higher the margin should be. And here is the gate, because individual clients can, after all, use the services of an intermediary.

Intermediaries - the very evil in the futures market?

It is the actions of intermediaries that are the most controversial on this market. For some of them, it is enough to pay only a part of the margin to maintain the position. Brokers treat this as lower limit of the amount of the collateral. However, when the margin account balance drops below the margin, the retail client typically receives a margin call. If he fails, the broker closes the position, liquidating the contract. Contrary to appearances, it happens quite often.

Not all brokers inform customers in advance. Moreover, some of them treat such information only as a paid option. The client (usually not very experienced) learns about the necessity of the surcharge too late and loses all capital.

Sometimes brokers calculate the necessary collateral from the entire portfolio. This means that in the event of e.g. insufficient coverage in a futures contract, the broker may not only compulsorily close forward positions, but also other positions, e.g. in the Forex market on the same client's account, until the additional payment obligation is met. Especially with large market movements, which are not uncommon in recent months, it is a straightforward way to lose a large part or even all of your capital.

More than half of the clients suffered losses

Hence the changes that were consulted with the industry. Federal Financial Supervisory Authority (BaFin) conducted a market study of futures trading in Germany among the largest intermediaries from July 2019 to June 2020.

The market investigation showed that trading volume contracts by retail clients at selected intermediaries averaged around EUR 20 billion per quarter. On average, more than half of retail clients incurred losses in trading in futures. For some, losses exceed 75% of clients.

The number of retail clients trading futures contracts is significantly higher than the number of professional clients. And it grows all the time. It almost tripled in 2018-2021.

Admittedly, the brokers defended themselves that additional payment obligations were required from a small number of investors. However, they also admitted that some requests for additional payments concerned six-digit amounts - counted in euro ... lever. In some cases in Germany it may be even 1: 1000.

Some are already fighting for customers

Fortunately, there are already brokers on the market who do not wait for the client's error. One supplier excludes any additional payment obligations for retail clients in trading futures. Others increase additional payment obligations for the customer, creating a kind of safety buffer.

The brokers also submitted a number of comments to the plans for new restrictions. They want, among others differentiate clients based on their experience as well as whether they are legal entities. They also call for better financial education, but do not indicate who exactly should take care of it.