For private investors, the German financial regulator does not consider Contracts for Difference (CFD) to be a particularly suitable financial investment. CFDs are highly speculative derivatives in which large leverage and the corresponding risk of loss are used to bet on currencies, stocks or commodities. In not infrequent cases, the losses in individual transactions also exceed the capital employed.
Since 2017, Bafin has therefore restricted the sale of these financial products, which are mainly traded by day traders – who speculate on a daily basis and invest a lot of time in front of the computer. The background to this so-called product intervention by the authority: The German supervisors – just like their colleagues from the EU securities regulator ESMA – have “considerable concerns for investor protection” when it comes to contracts for difference. In July 2019, the Bafin issued an unlimited general ruling that stipulates a limit on leverage and losses for CFDs. CFD providers are also not allowed to lure investors with starting credit or discounts and must warn them of a possible total loss in sales. When the Bafin checked in the summer of 2020 whether the brokers were adhering to the strict restrictions, they found violations in half of the CFD providers.
But the agency’s concerns and interventions have not stopped some of its employees from privately betting lively on these particularly speculative papers. From the beginning of 2018 to the end of September 2020, Bafin employees listed 298 CFD transactions, as can be seen from a response from the federal government to a small request from the FDP parliamentary group that Personal-Financial.com evaluated. A total of nine employees from different departments dealt with the papers.
More than half of all transactions (174) were accounted for in 2019. Particularly active during this time: an employee of the securities supervisory authority, who in some months traded CFDs based on currencies almost daily and in 2019 had 137 transactions. In the first nine months of 2020, other Bafin employees then processed 97 CFD transactions, which mainly related to shares as underlying values. The current answer from the federal government does not indicate which specific shares were involved. However, according to earlier research by Personal-Financial.com, ten CFD transactions by an employee from the insurance supervisory authority from May 2020 are known, which related to the share of the now insolvent payment service provider Wirecard.
On request, the Bafin did not want to comment on the CFD transactions of its employees. In fact, the transactions were permitted under the internal rules of supervision. For contracts for difference only the same insider trading prohibitions and reporting requirements apply as for other private financial transactions. However, like stocks and other certificates, CFDs cannot be identified via a securities identification number (ISIN), which makes it difficult to check the specific transaction. According to the federal government, the Bafin employees have to indicate the respective issuer of the paper and “other identification features” in the internal reporting system of the authority. In the “individual case” a “more extensive examination” was carried out, according to their answer.
As a result of the Wirecard scandal and the discovery of a large number of employee transactions with Wirecard papers, especially in the months before the bankruptcy, head of the authorities Felix Hufeld had already issued general restrictions in autumn. Since October, the supervisors are no longer allowed to trade papers from financial companies with their registered office or branch in the EU – including those that are supervised by the Bafin. According to the answer to the FDP request, this rule also applies to CFDs if the “main purpose of the investment” is bonds, stocks or derivatives of financial companies. As part of the law to strengthen financial market integrity, which the federal government passed in response to the Wirecard scandal, further trade restrictions are also provided for Bafin employees.
The parliamentary manager of the FDP parliamentary group, Bettina Stark-Watzinger, expressed sharp criticism of the financial bets. It was “like a real satire” when some employees of the financial supervision operate extensive CFD transactions, said the financial expert. “Who takes a supervisory authority seriously, which classifies CFD trading as high-risk, even though its employees speculate with it themselves?” Stark-Watzinger added that the state had to stick to what it asked of others. Therefore, the introduced trade bans are an important step. However, the Bafin does not recognize that mistakes have been made. “Hufeld should apologize for the mistakes and not continue to tell the story that the Bafin did everything right.”
Noticeable Wirecard deals
There are also new insights into suspicious Wirecard transactions by employees of the financial supervisory authority, for which an internal special audit was initiated after the bankruptcy of the group in June. In the years 2018 to 2020, 85 of the agency’s 2,700 employees traded around 500 times with Wirecard, some of them with high-risk certificates. Two employees from the WA2 department, which is responsible, among other things, for market supervision and the monitoring of short sales – which were relevant topics at Wirecard, even if Wirecard AG itself was not under the supervision of Bafin – were particularly active.
In the last three months before the bankruptcy alone, these two employees reported a total of almost 40 transactions related to Wirecard, i.e. with stocks and derivatives. As is now apparent from a new list by the Federal Ministry of Finance, the two employees bought, among other things, two certificates at the end of April and the beginning of May, which bet on falling prices. A few days later they sold the papers again. In two other cases, the colleagues also traded the same Wirecard derivatives – in these cases too, on the same days or only briefly offset.
In his answer, the ministry of Olaf Scholz (SPD), to which the Bafin is subordinate, emphasized that the employees concerned from the department responsible for “market analysis” had “no knowledge of inside information” in their business. A corresponding vote has been given by the superiors. However, the fact that the colleagues did business with the same financial products in parallel means that they must have coordinated their private investments. Wirecard was not an isolated case: The two of them also acted like a small “trading club” for the securities of other companies – which leads to the question: Did other Bafin people also exchange ideas about financial investments in the canteen or over a beer after work?