BaFin Product Intervention on Futures for Retail Clients

BaFin | Postfach 50 01 54 | 60391 FrankfurtSecurities Supervision |Asset ManagementMain address:Bundesanstalt fürFinanzdienstleistungsaufsichtMarie-Curie-Str. 24-2860439 Frankfurt | GermanyContact:Marc-Oliver MichelDivision WA 35Tel. +49 (0)2 28 41 08-1038Fax +49 (0)2 28 41 08-1550Marc-Oliver.Michel@bafin.dewww.bafin.deMain numbers:Tel. +49 (0)2 28 41 08-0Fax +49 (0)2 28 41 08-123BaFin locations:53117 BonnGraurheindorfer Str. 10853175 BonnDreizehnmorgenweg 13-15Dreizehnmorgenweg 44-4860439 FrankfurtMarie-Curie-Str. 24-28Lurgiallee 10Legally valid transmission of doc-uments signed with a qualifiedelectronic signature (section 3a ofthe VwVfG) solely via: qes-posteingang@bafin.dePage 1 of 48Ref. no.: WA 35-Wp 5427/00001#00273 (please quote in all correspondence) This translation is furnished for information purposes only. The original German textis binding in all respects.General Administrative Act - Product intervention regarding FuturesDear Sir or Madam,The followingGeneral Administrative Act is adopted:1. I am ordering a restriction on the marketing, distribution and sale of futures within the meaning of Article 4 (1)(15) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 onmarkets in financial instruments and amending Directives 2002/92/ECand 2011/61/EU (MiFID II), in conjunction with numbers 4 to 7 and 10 of Section C of Annex I to MiFID II, to retail clients domiciled in Ger-many by investment firms within the meaning of Article 1(1)of MiFID II in conjunction with Article 4(1)(1) of MiFID II. Investment firms are prohibited from marketing, distributing and sell-ing futures to retail clients within the meaning of Article 4(1)(11) of MiFID II domiciled in Germany, unless they are subject to the excep-tions addressed in paragraph 2.The restriction becomes effective as at 1 January 2023.2. Exceptions to the prohibition in accordance with paragraph 1 sen- tence 2 of the measure are cases in whicha. investment firms contractually exclude an additional payment obligation for retail clients and the loss of retail clients istherefore limited to the funds they deposit with the invest-ment firm for futures trading, or

Page 2 of 48b. before entering into the transaction, retail clients confirm to the investment firm for each futures transaction that they arepurchasing the future or the futures contracts solely for hedg-ing purposes.c. Futures are sold with purpose to settle or to close out existing (open) futures positions that were purchased before the Gen-eral Administrative Act took effect (offsetting transaction for settling an open futures position). 3. “Additional payment obligations” within the meaning of paragraph 2(a) relate to a contractual obligation of the retail client to compen-sate the investment firm for a loss after the forced liquidation of openfutures contracts by the investment firm by providing additionalfunds from the retail client’s other assets.4. “Hedging transactions” within the meaning of paragraph 2(b) are fu- tures transactions that are executed to hedge a specific underlyingtransaction or hedged item or a portfolio.5. The measure in form of a General Administrative Act is deemed to be published on the day following its announcement.6. I reserve the right to withdraw this General Administrative Act. 1. Factual and legal situation For the purposes of this General Administrative Act, “brokers” or “intermedi-aries” mean investment firms within the meaning of Article 4(1)(1) of MiFID II that give retail clients access to futures and are therefore also providers ofthese products. “Investment firms” mean investment services enterpriseswithin the meaning of section 2 (10) of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG). “Retail clients” within the meaning of Article 4(1)(11) of MiFID II are clients within the meaning of section 67 (3) of the WpHG. A “manufacturer” for the purposes of this General Administrative Act meansanyone who manufactures, creates, develops or issues futures. Manufacturersare thus primarily futures exchanges.

Page 3 of 481.1 General description of how futures workFutures are unconditional exchange-traded forward transactions. In the caseof futures, there is therefore a binding performance requirement for all con-tractual parties. Both purchasers and sellers must fulfil their delivery or ac-ceptance and payment obligations. In particular, “financial futures” (futures with underlying instruments such as currencies or equities) are usually not fulfilled through effective delivery and acceptance. In these cases, the com-mitment entered into is usually satisfied by a corresponding offsetting trans-action.Futures are standardised forward contracts that, among other things, refer-ence financial instruments and commodities, that involve a contractual obli-gation to deliver (short position) or receive (long position) a certain quantity of an underlying instrument at a price determined at the time the contract isentered into and at a later date agreed at the time the contract is enteredinto. The profit potential from long futures is theoretically unlimited, and themaximum loss is limited to the amount of the futures (contract value). In the case of short positions, however, the risk of loss is unlimited.Futures are traded on a stock exchange (futures exchange). This exchange (in Germany, for example, the European Exchange – EUREX Frankfurt AG (EUREX) or the European Energy Exchange (EEX)) determines standardised features for futures contracts, such as the contract size, in order to enable trading.The contract size determines the quantity of an underlying instrument thatmust be delivered for a contract. Most of the equity futures traded on EUREXhave a contract size of 100 shares. In the case of indices, by contrast, thecontract value is given per index point. For example, a DAX future has a con-tract value of EUR 25 per point and, with an index level of 16,000 points, ittherefore has a contract value of EUR 400,000.The futures exchanges require trading participants to deposit collateral in theform of capital injections (margins) before they can trade in futures. The fu- tures exchange requires the trading participants to deposit this collateral inorder to ensure that the transaction entered into can be fulfilled in the future.Theoretically, the collateral deposited should large enough so that the central See Grill, W.; Perczynski, H., Wirtschaftslehre des Kreditwesens, 2021, p. 353. See Grill, W.; Perczynski, H., Wirtschaftslehre des Kreditwesens, 2021, p. 357. See Grill, W.; Perczynski, H., Wirtschaftslehre des Kreditwesens, 2021, p. 354. See Grill, W.; Perczynski, H., Wirtschaftslehre des Kreditwesens, 2021, p. 357. See Hull, J., Optionen, Futures und andere Derivate, 2019, p. 31 et seq.

Page 4 of 48counterparty (CCP) can close out the position in question on the next trading day and any resulting losses are covered by the collateral deposited. Theamount of the required collateral is defined by the futures exchange itself. Inprinciple, the higher the risk or volatility of an underlying instrument in thefutures contract, the higher the margin that must be deposited.However, retail clients cannot trade futures directly through the futures ex-change, but only through an intermediary. For this reason, trading by retailclients described in the following means with the involvement of intermedi-aries.At the beginning (opening of the futures contract or purchase of the future), the investor must pay an “initial margin” to a “margin account” with the in-termediary. This is generally revalued at the end of each trading day. Thisvaluation is also termed “marking to market”.In addition to the initial margin, the futures exchange determines a certainmargin account amount below which the account balance may not fall(maintenance margin). The maintenance margin is slightly below the initialmargin. The brokers treat the additional payment obligations of the futuresexchange at least as a lower limit for the amount of collateral to be providedby the retail client. If the balance of the margin account falls below themaintenance margin, the retail client generally receives a margin call. Theymust top up the account – partly within a certain specified time frame – tothe level of the initial margin. This additional payment is also termed a “vari-ation margin”. If the retail client does not make an additional payment, thebroker closes out the position by liquidating the contract. This is alsotermed “forced liquidation” or “automatic close-out”.Retail clients can themselves decide following a margin call whether theywant to increase their “stake” or whether the contract should be (forcibly) closed out by the broker. If the loss arising when the contract is closed out isnot covered by the margin, the intermediary can require the retail client to See Bösch, M., Derivate - Verstehen, anwenden und bewerten, 2020, p. 178. Note: Retail clients are restricted from trading directly on futures exchanges. As a rule, only insti-tutional investors are admitted as clearing members or non-clearing members as trading partici-pants in a futures exchange. See Hull, J., Optionen, Futures und andere Derivate, 2019, p. 58. See Möhl, E., Optionen und Futures, 2002, p. 33. See Hull, J., Optionen, Futures und andere Derivate, 2019, p. 58.

Page 5 of 48make an additional payment (compensation for the loss by transferring ad-ditional funds). Although many intermediaries have implemented such a margin call proce-dure and actively tell investors about potential insufficient coverage or im-pending negative balances on the margin account, this is not the case withall intermediaries. In their general terms and conditions, intermediaries alsodo not normally undertake to make a margin call, but see this as an (optional) service offering for retail clients. In addition, in particular in the event ofstrong price movements, it may not be possible to make a margin call ingood time and the position may have to be forcibly closed out before theretail client is informed.An additional payment obligation for the purposes of this General Admin- istrative Act arises if the capital held by the retail client (capital paid to or deposited with the intermediary for the purposes of futures trading) is insuf- ficient to compensate for losses incurred, even after any forced liquidation orthe liquidation of other futures contracts, and the retail client must makegood these losses from their other assets. The additional payment obligationis thus a call on the retail client to offset losses. Any voluntary increase in thevariation margin by the retail client to avoid forced liquidation of open con-tracts therefore does not constitute an additional payment obligation for thepurposes of this General Administrative Act.In some cases, the margin obligations are determined by the intermediariesat the portfolio level. In such cases, all additional payment obligations in fu-tures or options trading are offset against each other. In the event of insuffi-cient coverage in a futures contract, for example, the intermediary could thennot only forcibly close out futures positions, but also other positions, untilthe (additional payment) obligation is fulfilled by liquidating other transac- tions.In the past, especially in the case of special market events (“black swan” events) and associated unexpected, significant price fluctuations that ran counter to retail clients’ expectations, it was evident that considerable addi-tional payment obligations could arise that could have existential conse-quences for retail clients. Prominent “black swan” events are the slump in oilprices in spring 2020 or the “Swiss franc crash” in January 2015.In these situations, the collateral provided by retail clients was often insuffi-cient to cover the losses incurred. Because of strong price fluctuations, retailclients mostly did not have time to voluntarily increase their collateral, so

Page 6 of 48brokers had to forcibly close out positions. Since the liquidation of other (fu- tures) positions or contracts – to the extent they existed – could not cover all of the losses, retail clients were forced to settle the outstanding amountsfrom their other assets. In such cases, the losses resulting from the transac-tions in question often exceeded the amount invested by a multiple. Theamount of any possible additional payment obligation and the amount thatthen has to be reimbursed is not limited to the original amount, but can befar more. This results in the risk that retail clients in particular are not awareof the extent of the actual risk of loss or significantly underestimate it.Due to the way futures are designed, there is also the risk of additional pay-ment obligations when the overall market develops normally, for example ifindividual underlying instruments such as shares or commodities movestrongly in a different direction in the short term than investors expect. addi-tional payment obligations therefore arise not only in the case of the specialmarket events described above, but also typically in the case of volatility ormarket developments affecting specific underlying instruments.In this case, the multiplier (the loss may exceed the capital paid in by a mul-tiple) results from the leverage effect, as only a fraction of the contract valueof the future is required to be held by the retail client in the form of themargining requirements. In the example of a EUREX contract, it is not neces-sary to invest the entire contract total of EUR 400,000 for a DAX future withan assumed index level for the underlying instrument of 16,000 points, butonly EUR 31,200 must be deposited. This corresponds to a margin of 7.8% ofthe contract value (see also example in Table 1). The ratio of the contract value to the required (initial) margin also indicates the level of the leverage. Retail clients do not have to invest the entire amount, but essentially specu-late on credit.In principle, futures have a defined term because they have a fixed maturitydate. Retail clients can trade contracts at any time through intermediaries.Additionally, before or at the maturity of the future, retail clients have theoption to extend their investment by “rolling” the contract. The investment isextended by entering into a new contract with the same underlying instru-ment. Depending on the way the market develops (contango or backwarda-tion), losses or gains can be generated by rolling futures. 1.2 Trading futures in Germany – market surveyFutures are traded on futures exchanges such as EUREX or EEX in Germany.Trading participants who want to trade directly on EUREX must be admitted

Page 7 of 48as EUREX trading participants. Private individuals cannot obtain EUREX mem-bership. Retail clients therefore depend on a member of the exchange sothat they can trade on EUREX through this intermediary. The intermediarypurchases or sells the futures under the terms of a principal broking transac-tion.In Germany, intermediaries (investment firms) currently also offer retail cli-ents the ability to trade in futures. As a rule, offering futures transactions toretail clients is only a sideline for the providers, who often offer a wide rangeof financial instruments (including CFDs) for retail clients. Especially since the CFD product intervention measure entered into force, however, futures areregularly promoted to retail clients by intermediaries as an alternative to CFDtrading. Intermediaries also use partner or affiliate marketing to acquire newclients for futures trading.Since the contract sizes in futures trading are usually six-figure, EUREX alsooffers “mini” or “micro” futures contracts, for example. These were launchedby futures exchanges to make futures trading more attractive for retail cli-ents. For example, EUREX advertises mini DAX futures as being particularlysuited for experienced retail clients and smaller securities portfolios.Retail clients generally purchase futures for hedging and speculation: inves-tors can offset price losses in underlying instruments (on the spot market) using futures. Futures are used in particular in the commodity and agricul-tural markets to hedge price risks of physical underlyings. Losses from thefutures transaction are generally offset by gains in the underlying if the futurewas purchased as a hedging instrument to reduce price risks. Losses fromany forced liquidation of the futures position are also offset by the corre-sponding – mostly physical – position (underlying). In this situation, compen- sation does not happen on an account basis, but generally only in substance.Retail clients who carry out such hedging transactions are in particular smalland medium-sized undertakings from the agricultural and energy supply sec-tors. See EUREX, https://www.eurexchange.com/exchange-de/handel/boersenmitgliedschaft, ac-cessed: 26 September 2022. Note: Mini or micro futures contracts are offered by some futures exchanges. See Hull, J., Optionen, Futures und andere Derivate, 2019, p. 55. Note that, in contrast to these mini contracts, “mini futures” offered by other market partici-pants are not actually futures, but rather leverage certificates and thus bearer bonds. See EUREX, https://www.eurex.com/ex-de/maerkte/idx/mini-dax, accessed: 26 September 2022.

Page 8 of 48Moreover, retail clients who do not hold any underlyings to be hedged andtrade futures for speculative purposes can exploit market changes in the un-derlying instrument for only a small stake due to the low capital required (the margin) and the resulting leverage effect. Retail clients can therefore essen-tially speculate on the performance of a variety of underlyings using futureson credit, because they only actually need to hold a fraction of the contractvalue.Micro and mini futures in particular make it easier for retail clients to enterthe market, since the investors can avoid the normally high contract sizes andthus also the comparatively high collateral they are required to deposit. Forretail clients, these forms of futures have the advantage that the absoluteamount of the margin that must be deposited is smaller than in the case ofconventional futures contracts.This is illustrated by the following example of DAX futures contracts with aninitial margin of 7.8 % and an assumed DAX level of 16,000 points:Futures contractContract valueContract equivalentInitial marginDAX futureEUR 25EUR 400,000EUR 31,200Mini DAX futureEUR 5EUR 80,000EUR 6,240Micro DAX futureEUR 1EUR 16,000EUR 1,248Table 1: Illustrative comparison of different DAX futures contractsFor instance, based on the example shown above, when they trade a microDAX future, retail clients are only required to deposit 4 % of the margin inabsolute terms that would be required if they were trading a conventionalDAX future. These designs therefore also make futures trading attractive forinvestors who want to, or can only, invest a relatively small volume.The Federal Financial Supervisory Authority (BaFin) conducted a market sur-vey of futures trading in Germany to obtain further information that it can See Grill, W.; Perczynski, H., Wirtschaftslehre des Kreditwesens, 2021, p. 359. Based on: https://www.eurex.com/ex-de/maerkte/idx/mini-dax. See https://www.eurex.com/ex-de/maerkte/idx/dax/Micro-DAX-Futures-2627906, accessed: 26September 2022.Note: In relation to the contract equivalent, the margin (in this case 7.8 %) remains the same.

Page 9 of 48use as a basis for assessing significant investor protection concerns with re-gard to retail clients. For this purpose, BaFin asked a selection of intermedi-aries in Germany that are considered to be significant to provide infor-mation about customers and their trading behavior.In addition, BaFin requested information about how futures are marketedand distributed. The survey period for the market survey was July 2019 toJune 2020.The market survey showed that the volume of futures trading by retail clientsat the intermediaries surveyed averaged around EUR 20 billion per quarterduring the survey period. On average, more than half of the retail clients in-curred losses in futures trading. The loss rate of the investors varies greatlydepending on the reference period and the provider. In some cases, however,loss rates in excess of 75 % are evident. This leads to the conclusion that, insome cases, three out of four retail clients suffer futures trading losses. Sig-nificant losses arise not merely in respect of individual futures positions, butalso when the entire futures portfolio of retail clients is analysed.According to BaFin’s observations made in the course of its supervisory ac-tivities, the number of retail clients trading in futures is considerably higherthan the number of professional clients. Both the volume of trading and thenumber of retail clients trading in futures increased by around 15 % over theobservation period of the market survey. In total, the volume of futurestraded by retail clients in Germany in the survey period was around EUR 78billion.It is also clear that retail clients in particular trade “mini” or “micro” contracts,for which lower absolute additional payment obligations are common.Additionally, BaFin performed an analysis on the basis of the reporting datarequired by Article 26 of MiFIR following the consultation. This revealed that Note: Intermediaries that are specialised in hedging, in particular for the agricultural sector,were not part of the market survey. Note: Some of the providers were also asked to provide additional information on additionalpayment obligations between January 2018 and June 2021. Note: Refers to individual positions, not to portfolios. No distinction with regard to the motivefor investing. Note: The sum of the four quarters surveyed at the intermediaries concerned in the course ofthe market study, not the trading volume of the total market. Note: The analysis included only futures contracts that are traded on EUREX.

Page 10 of 48the number of clients who traded futures contracts on EUREX rose by a fac-tor of almost three between 2018 and 2021. For example, around 70,000 cli-ents traded EUREX futures in 2021, based on the data collected.It is also already evident that the number of clients who trade mini and microfutures will continue to increase this year compared with 2021. Approxi-mately one-quarter of futures transactions by clients in EUREX products in-volve mini or micro futures.Based on the findings of the market survey, the number of professional cli-ents who trade futures with intermediaries is considerably lower than thenumber of retail clients doing so. Because of the growing volume of futurestrading in Germany, the increasing advertising activities of intermediaries andthe greater range of mini and micro futures on offer, BaFin assumes that mar-ket growth in the retail client sector will continue to rise and that the overallvolume of futures being traded by retail clients will further increase in futurein line with the number of retail clients. There is a trend towards a largernumber of retail clients and the popularity of futures.BaFin assumes that in future, intermediaries will continue to advertise theproducts or will even step up their efforts to do so, and that future investmentfirms will offer futures trading for retail clients and will expand their offeringsaccordingly. Dialogue with market participants, and in particular with futuresexchanges, additionally confirmed BaFin’s assumption. They are also antici-pating growing demand for futures products for retail clients, and hence alsoa growing number of retail clients who trade in futures. For example, somemarket participants are planning to expand their product portfolio with re-gard to futures.Additionally, BaFin presumes that even more intermediaries, including thosefrom other countries in the European Economic Area (EEA) that were not the subject of the market survey, give retail clients in Germany access to futures.Based also on the growing advertising activities by the providers and the in-creased offering of mini and micro futures, BaFin assumes that the numberof retail clients who trade in futures will also continue to rise. For example,on the basis of an analysis performed by BaFin after the consultation, it canbe assumed that the number of clients who trade in mini and micro futureswill also grow further this year compared with 2021. Approximately one-quarter of futures transactions by clients in EUREX products already involve Note: The Article 26 reporting data does not distinguish between “retail clients” and “profes-sional” clients as defined by MiFID II.

Page 11 of 48mini or micro futures. The analysis also revealed that clients who traded inmini or micro futures also trade in conventional futures contracts. For thisreason, it can be assumed that the number of retail clients who trade in con-ventional futures will also continue to grow this year.During the analysis period of the market survey, the intermediaries surveyedstated that additional payment obligations were required from a low numberof investors overall at the time. However, some of the requests for additionalpayments were for six-digit EUR amounts. Based on the additional insightsgained, it can be assumed that, as the number of retail clients who trade infutures or who trade in larger volumes of futures increases, the number ofadditional payment obligations will also increase overall in absolute terms.Although the survey of the intermediaries showed that, as a rule, retail clientstrade futures with leverage of less than 50, the intermediaries also said therewas leverage of up to 1,000 in isolated cases, depending on the underlyinginstrument. It is also clear that retail clients in particular trade “mini” or “mi-cro” contracts, for which lower absolute additional payment obligations arecommon.The market survey showed that some providers have established mecha-nisms that positively affect investor protection. For example, one providerrules out any additional payment obligation for retail clients in futures trad-ing in its general terms and conditions. Other providers increase the addi-tional payment obligations for the client specified by the futures exchangeto create a kind of security buffer. This means that the retail client must de-posit a higher margin with the provider than the margin required by the fu-tures exchange. The intention is to reduce the risk of additional payment ob-ligations, since there is already a higher level of collateral than required bythe futures exchange. However, no homogeneity as regards these mecha-nisms was observed in this respect.1.3 Restrictions on additional payment obligations already in forceBy way of a General Administrative Act of 23 July 2019, BaFin restricted themarketing, distribution and sale of “contracts for difference” (CFDs). In Ger- many, CFDs may only be marketed, distributed and sold to retail clients ifcertain conditions are met. One of these conditions is that there must be anassurance that investors do not have to make any additional payments andany loss is limited to the amount invested (negative balance protection). This now appears in the terms and conditions of the CFD providers.

Page 12 of 48In its General Administrative Act of 8 May 2017, BaFin had already prohibitedthe marketing, distribution and sale of CFDs with an additional payment ob-ligation to retail clients in Germany. The background to this product inter-vention measure were the at times significant margin payment obligations inconnection with the “Swiss franc crash” in January 2015.Additional payment obligations for various financial instruments are addi-tionally excluded by law: investment products with additional payment obli-gations are not permitted under section 5b (1) of the German Capital Invest-ment Act (Vermögensanlagengesetz – VermAnlG). Section 152 (1) of the Ger- man Investment Code (Kapitalanlagegesetzbuch – KAGB) also rules out any obligation to make an additional payment obligation for limited partners ofan investment limited partnership (Investmentkommanditgesellschaft). 1.4 Consultation on the product intervention measureOn 17 February 2022, BaFin published a draft general administrative act re-stricting trading in futures by retail clients in Germany and gave the partiesinvolved an opportunity to submit comments by 25 March 2020 in accord-ance with section 28 (1) of the Administrative Procedure Act (Verwaltungsver- fahrensgesetz – VwVfG). BaFin received comments within the meaning of section 13 (1) no. 2 of the VwVfG from a total of four involved parties in the course of the consultation.It also received feedback from 47 parties that are not involved parties in thelegal sense. These related to submissions by stock exchanges, stakeholderassociations of the banking and agricultural industries, and citizens.The comments by the petitioners were mainly as follows:Petitioners are calling for an exception for retail clients who trade futures ex-clusively for hedging purposes. The measure should only be limited to spec-ulative transactions. They argue that commercial investors in particular usefutures as an instrument to hedge the risks of price fluctuations relating toan underlying as part of their real economic activity. These futures tradersalso own the (physical) underlying themselves, so that the risk of additional payment obligations is offset by gains in the relevant underlying. In particu-lar, petitioners from the agricultural sector are calling for the exemption offarmers and other undertakings from the agricultural sector, as using futuresas a hedging instrument for prices on agricultural commodity markets is ofgreat importance and existential for them. It is argued that these persons or

Page 13 of 48companies trade futures exclusively for hedging purposes against fluctua-tions in the price of the underlying and not as an investment, but do not meetthe criteria for classification as professional clients and therefore also tradeas retail clients.Some petitioners argue that retail clients who trade futures as a legal entityeffectively do not bear the risk of unlimited loss because their liability is lim-ited per se and does not generally extend to private assets. In their opinion,retail clients with the form of legal entities should therefore be exempt fromthe measure.With regard to the addressees of the product intervention measure, two pe-titioners argue that BaFin did not specify the client group in sufficient detail.They are calling for an internal differentiation of clients.Petitioners criticise the market survey carried out by BaFin. On the basis ofthis survey, they claim that it was not possible to prove any significant riskfor retail clients in futures trading with additional payment obligations. Theyargue that there is no systematic evidence to support the proposition thatretail clients are confronted to a particular extent with margin calls in highlyvolatile market phases. Although both the slump in oil prices and the “coro-navirus crash” occurred during the period of the market survey, they claimthat the market survey was unable to identify any accumulation of margincalls for retail clients. The six-digit additional payment obligations describedabove are merely outliers. There was therefore no sufficient evidence of anyspecial risk for retail clients in extreme situations. Nor was the market surveyable to demonstrate any unusually high loss rates in futures trading by retailclients.Petitioners describe alternatives to the product intervention measure thatthey believe could represent more moderate means. As an example, petition-ers would prefer regulated margin requirements or the implementation ofstandardised margin call procedures over restricting futures trading for retailclients. Overall, many petitioners call for better financial education and sug-gest introducing testing or screening procedures as a condition for futurestrading. Some petitioners regard limiting the product intervention measureto futures with risky underlyings or short trades as a more moderate means.Others are calling for limiting the loss to the contract value of the future, orthat, alternatively, investors should consent to an additional payment obliga-tion. In addition, petitioners argue that increased supervision of compliancewith information and conduct of business obligations by intermediaries or

Page 14 of 48imposing narrower target market criteria would eliminate investor protectionconcerns.Petitioners argue that the product intervention measure is not proportionate.It would lead to higher costs for retail clients and higher margin require-ments. Petitioners argue, further, that the measure would curtail the freedomof retail clients. Additionally, excluding the additional payments obligationwould lead to additional risks for retail clients because they would have toswitch to more risky offerings. Furthermore, petitioners fear that intermedi-aries will not bear these costs or the risk of margin requirements themselvesand will no longer offer futures to retail clients. Retail clients would then beforced to switch to other products such as leverage certificates or CFDs.One petitioner argues that, in some cases, futures have longer maturities thanthe intended three-month transitional arrangement. To avoid negative con-sequences for investors, futures transactions used to settle existing positionsshould therefore be excluded, since closing out an open position usually hap-pens using an offsetting transaction (grandfathering). 2. Legal assessmentThe present General Administrative Act is a restriction on marketing, distri-bution and sale of futures within the meaning of the 2nd alternative of Article42(1) of Regulation (EU) No. 600/2014 of the European Parliament and of the Council of 14 May 2014 on markets in financial instruments and amendingRegulation (EU) No. 648/2012 (MiFIR). The marketing, distribution and sale of futures to retail clients domiciled in Germany will not be prohibited with-out restriction. For example, the restriction generally only applies with regardto the client group of retail clients who are resident in Germany.Additionally, under the conditions (exceptions) referred to in paragraph 2 of the operative part, it will still be possible to market, distribute and sell futuresto retail clients. Because of these exceptions, the present General Adminis-trative Act is less intrusive than planned in the draft made available for con-sultation.According to the factual and legal situation on which this General Adminis-trative Act is based, the present restriction on marketing, distributing andselling futures to retail clients domiciled in Germany is lawful, expedient andproportionate.

Page 15 of 482.1 Criteria for the application of the enabling provision (Article 42 of MiFIR)The present restriction issued by BaFin is based on Article 42(1) and (2) of MiFIR. Under the first sentence of Article 42(2) of MiFIR, BaFin may prohibit or restrict the marketing, distribution and sale of financial instruments withcertain specified features if it has justified reasons for ascertaining that thefinancial instrument gives rise to significant investor protection concerns, thatexisting regulatory requirements under Union law applicable to the financialinstrument do not sufficiently address the risks referred to in the first sen-tence of Article 42(2) of MiFIR, that the issue would not be better addressed by improved supervision or enforcement of existing requirements, and thatthe action is proportionate, taking into account the nature of the risks iden-tified, the level of sophistication of investors or market participants con-cerned and the likely effect of the action on investors or market participants.The criteria described above are met in the present case.2.1.1 Financial instrument with certain specified featuresFutures are financial instruments with certain specified features. They are de-fined as financial instruments in Article 4(1)(15) of MiFID II in conjunction with numbers 4 to 7 and 10 of Section C of Annex I of MiFID II or in section 2 (3) no. 1 and no. 2 of the WpHG in conjunction with section 2 (4) no. 4 of the WpHG, which transposes these MiFID II provisions into German law.Futures are defined as unconditional exchange-traded forward transactions.Over-the-counter (OTC) forward transactions therefore do not fall within the scope of this General Administrative Act.2.1.2 Significant investor protection concernsThe marketing, distribution and sale of futures to retail clients gives rise tosignificant investor protection concerns within the meaning of Article 42 ofMiFIR. The significant investor protection concerns arise from the specific in-herent features of futures and the fact that the legal and economic conse-quences resulting from additional payment obligations for the client groupof retail clients are particularly detrimental and associated with incalculablerisks of loss.MiFIR introduced a directly applicable right of product intervention in the EUMember States effective 3 January 2018. Based on Article 42(7) of MiFIR, the

Page 16 of 48European Commission set out criteria and factors in Article 21 of DelegatedRegulation (EU) 2017/567 of 18 May 2016 (Delegated Regulation) that must be taken into account by the competent authorities when exercising theirproduct intervention powers. On the basis of Article 42 MiFIR, I am makinguse of this (non-exhaustive) list of criteria. On the basis of an analysis of the criteria and factors referred to in Article 21(2) of the Delegated Regulation, I have justified reasons for ascertaining that the marketing, distribution andsale of futures to retail clients domiciled in Germany gives rise to significantinvestor protection concerns within the meaning Article 42(2) (a)(i) of MiFIR. In determining whether these financial instruments give rise to significant in-vestor protection concerns, I have in particular taken into account the follow-ing criteria and factors listed in Article 21(2) of the Delegated Regulation:  the degree of complexity of the financial instrument in relation to the type of clients to whom the financial instrument is marketed or sold,taking into account, in particular, the complexity of the performancecalculation and the nature and scale of any risks (point (a) of Arti-cle 21(2) of the Delegated Regulation);  the size of any detrimental consequences, considering in particular the number of clients, investors or market participants involved, therelative share of the product in investors’ portfolios, the probability,scale and nature of any detriment, including the amount of loss po-tentially suffered, the volume of the issuance, the growth of the mar-ket and the average amount invested by each client in the financialinstrument (point (b) of Article 21(2) of the Delegated Regulation);  the type of clients to whom a financial instrument is marketed or sold, taking into account, in particular, whether the client is a retail client,a professional client or an eligible counterparty (point (c) of Arti-cle 21(2) of the Delegated Regulation);  the particular features or components of the financial instrument, in- cluding any embedded leverage, taking into account, in particular, theleverage inherent in the product (point (e) Article 21(2) of the Dele- gated Regulation);  the existence and degree of disparity between the expected return or profit for investors and the risk of loss in relation to the financial in-strument, taking into account, in particular, the risk-return profile(point (f) of Article 21(2) of the Delegated Regulation);

Page 17 of 48 the selling practices associated with the financial instrument, in par- ticular the communication and distribution channels used and the in-formation, marketing or other promotional material associated withthe investment (point (j) of Article 21(2) of the Delegated Regulation). After taking into account the relevant criteria and factors, I have come to theconclusion that futures give rise to significant investor protection concernsfor retail clients for the following reasons.In particular, because of the risk that retail clients can lose more capital thanthey have invested, there are considerable investor protection concerns withregard to futures. In an overall assessment, these are also reinforced by theleverage inherent in the product or by speculation that is essentially on credit,as well as by the selling and distribution practices in connection with futurestrading.2.1.2.1 Risk of unlimited lossThe scale of potential detrimental consequences and the disparity betweenthe expected profit and the risk of loss is significant for futures in particularbecause of the risk of additional payment obligations. Because of the factthat the loss from investing in such a financial instrument may exceed theamount invested by a multiple, the risk-return ratio is considered to be highlydetrimental to retail clients. The potential loss may be unlimited and is notlimited to the amount invested.Although BaFin’s market survey indicated that additional payment obliga-tions occur relatively rarely in a conventional market environment, the risk ofadditional payment obligations mainly arises in the case of atypical, specialmarket events (“black swan” events). In such highly volatile market phases or in the case of sharp price movements, there is a risk that retail clients willhave to make the additional payments from their other assets. The marketsurvey revealed that, in some cases, six-figure amounts were being de-manded from retail clients after forced liquidation.Furthermore, there is no compulsion for intermediaries to make a margin call,and they can do so voluntarily. Retail clients cannot therefore rely on inter-mediaries exercising their initiative to inform them in the event of imminentinsufficient coverage.

Page 18 of 48It may also happen that, even after they receive a margin call, the retail clientmay only have a few minutes left to voluntarily increase the collateral. In the-ory, this means that the retail client must be reachable at all times so theycan respond to a margin call and so they can also have the opportunity tomake the funds available promptly.The intermediary will try to close out the contract if there is insufficient cov-erage in the margin account. If the collateral deposited by the retail client isnot sufficient to offset the losses, the intermediary will require the retail clientto deposit the outstanding excess amount.As a rule, forced liquidation does not happen in the interest of the retail cli-ent, but is executed by the intermediary in its own interest. Although otherexisting positions are usually liquidated initially in the event of insufficientcoverage until the required margin level is reached, there is a risk of addi-tional payment obligations if retail clients have only opened a few positionsor even only a single position. Liquidating or closing out other (forward) po-sitions above and beyond the relevant contract subject to the additional pay-ment obligation can also be detrimental for the retail client. It may result inlosses being incurred for transactions that are not directly related to futurestrading or the specific futures contract in question.In particular, in the event of very high price gyrations, the outstanding marginmay exceed the amount already invested. There is no upper limit for the ad-ditional payment. Theoretically, the margin – and thus also the possible loss– may be unlimited, at least in the case of short futures contracts.By contrast, the risk of unlimited loss and thus also the considerable investorprotection concerns do not exist if investment firms or intermediaries excludeadditional payment obligations in binding contracts with the retail client. Thisis reflected in paragraph 2(a) of the operative part, which includes an excep-tion for the case of a contractual exclusion of any additional payment obli-gation.Nor are there any significant investor protection concerns if retail clients usefutures for hedging purposes and hold the corresponding underlying or anunderlying transaction to be hedged. The reason for this is that it can beassumed that losses or settlement requirements from futures trading will beoffset by gains or proceeds from the underlying transaction to be hedged. Insubstance, the risk of loss in the context of margin calls does not crystallisebecause active market participants engage in “side-by-side risk manage-ment” with the relevant physical underlying. In substance, any losses from

Page 19 of 48forced liquidation of a futures position will be offset by the correspondingphysical position or by gains from the offsetting transaction. This is reflectedin paragraph 2(b) of the operative part, which excludes purely hedging trans- actions from the General Administrative Act. The significant investor protec-tion concerns thus relate to cases where futures are not traded by retail cli-ents for hedging purposes, or where there is no contractual exclusion by theinvestment firm of additional payment obligations.2.1.2.2 Type of clients and market developmentRetail clients use intermediaries to gain access to a market they would oth-erwise be restricted from accessing. In principle, retail clients are restrictedfrom trading directly in futures on a futures exchange. Retail clients can onlytrade in futures if they use intermediaries who in turn operate directly onfutures exchanges.However, despite existing requirements (target market identification, assess- ment of appropriateness or suitability), it cannot be ruled out that retail cli-ents who do not have the necessary level of knowledge and experience, oronly do so insufficiently, might also trade in futures.In particular for retail clients who do not have extensive experience andknowledge of trading on futures exchanges, the functioning and the risk-return profile of futures with additional payment obligations are generallytoo complex and difficult to understand. In addition, even experienced retailclients are rarely able to identify the risk of an additional payment obligationand are not protected against the dangers of “black swan” events or the en-suing negative financial consequences. Increased complexity arises above allfrom the risk of an additional payment obligation. Additional complexityarises from the margining requirements and the requirement for permanentaccessibility or monitoring of the custody account or margin accounts in or-der to avoid forced liquidation that is often associated with this. Continuousmarket monitoring is necessary when trading in futures. These are not “buyand hold” investments. For retail clients, the rolling processes describedabove and their impact on the return are also generally complex.However, in terms of both the volume and the number of futures trading byretail clients, double-digit positive growth rates can be observed during theperiod of the market survey conducted by BaFin. Additionally, an analysis ofreporting data by BaFin revealed that the number of clients who traded inEUREX futures grew by a factor of around three between 2018 and 2021.Further growth in and an increasing spread of futures trading in future

Page 20 of 48among retail clients can be expected, especially because of the greater num-ber of mini and micro futures contract offerings. For example, BaFin expectsthe number of clients trading in mini and micro futures contracts will growfurther in 2022.It can therefore be expected that, as the number of retail clients who trade infutures increases, the number of margin calls will also increase. Because ofthis growing market importance – both in terms of the trading volume andthe number of retail clients – it can be assumed that, in absolute terms, evenmore retail clients will have to make additional payments, and will thereforelose more than the amount they have invested in futures trading. These ob-servations are also confirmed by other market participants, for example thefutures exchanges. They assume that, as the number of trading retail clientsgrows, there will also be rising demand from retail clients for futures prod-ucts, accompanied by growth in the product offering in future.Additionally, BaFin saw that futures are sometimes advertised as an alterna-tive to CFD trading by both intermediaries and “affiliated partners”. It cantherefore also be assumed that, because of the increasing advertising activi-ties of intermediaries and other market participants, there will also be growthin the spread of futures as an investment instrument for retail clients.It is precisely because of the advertising activities and the increasing spreador launch of micro and mini futures contracts that retail clients who may nothave a sufficient level of knowledge and experience in trading such complexproducts will continue to be introduced to futures trading. Investors are in-creasingly seeking new investment opportunities, especially in light of a lowinterest rate environment and investors’ desire to achieve a return on capitalthat is above market levels. This also increases the risk that retail clients areletting themselves be distracted from the above-average risk (the additional payment obligation) because of advertising claims and promised returns, with the result that they invest in high-risk products that are fundamentallyunsuitable for them. Futures are expressly not designed as long-term (cash) investments, but merely for hedging or as a speculative instrument.The growing proliferation is mainly due to retail clients who trade futures forspeculative purposes. This is not only because of the design of the advertis-ing, but also to the fact that it cannot be assumed that the demand for hedg-ing instruments from retail clients is constantly increasing to the sort of ex-tent observed in the market survey. Otherwise, the number of underlyingtransactions and the hedging requirements of retail clients would have tohave risen steadily to the same extent, which cannot be assumed. Rather,

Page 21 of 48retail clients are seeking opportunities to achieve above-market returns withfutures trading. That is why futures are also regularly mentioned by petition-ers in the consultation procedure in the same breath as other speculativefinancial instruments such as CFDs or leverage certificates.Trading futures for speculative purposes by retail clients using the shell of alimited liability company, such as a GmbH, does not – contrary to the com-ments of petitioners – offer sufficient protection against the risks describedabove. Although the other private assets of the retail client are not generallyaffected, the entire assets of the company are at risk, up to and includinginsolvency.2.1.2.3 Complexity of performance and speculation that is essentially on creditLeveraged products must by their very nature be classified as extremely com-plex because retail clients normally find it difficult to assess the performanceof these products, in particular due to their increased volatility. The additionalpayment obligation further increases and intensifies the complexity of calcu-lating performance. The maximum loss or the maximum amount of any lossand thus the risk of such an investment cannot be determined by the retailclient because of the additional payment obligation, since the loss is not lim-ited exclusively to the amount invested. The actual risk of loss of such aninvestment cannot therefore be assessed by retail clients in futures with anadditional payment obligation. This applies in particular to the case of shortpositions in which the loss is not limited at least to the contract value.Since retail clients only have to deposit a margin and thus only a fraction ofthe traded contract value, margin trading is a form of speculation on credit.Retail clients do not have to have the entire contract value at their disposal,and only a fraction of it is more than enough. As a result, retail clients areexposed to the economic consequences of speculation through an invest-ment amount that they only have to put up to a small extent. This is equiva-lent to a leveraged investment strategy and can even lead to existential risks(insolvency) for retail clients. The lawmakers believe that this form of leveraged speculation has a particu-larly high risk potential. This is shown by the fact, for example, that Article 62(2) of Regulation (EU) 2017/565 supplementing Directive 2014/65/EU im-poses a special reporting obligation on the asset manager in the case of aleveraged financial portfolio. Where the management of retail client accounts

Page 22 of 48relates to a transaction involving an uncovered position in a contingent lia-bility transaction, investment firms must also report uncovered losses on con-tingent liabilities or losses that are not fully covered to the retail client.In addition, the lawmakers classify granting loans to others under Article 4(1)(3) of MiFID II in conjunction with Annex 1 Section B(2) to MiFID II as anancillary service subject to supervision if the loans are granted to carry outinvestment services in which the undertaking granting the loan is itself in-volved. This shows that the lawmakers only consider it permissible to enableleveraged speculation by retail clients under certain conditions, which makesit necessary to establish specific arrangements to protect retail clients. Theseassessments by the lawmakers justify protecting a retail client investor whopurchases futures, who is economically equivalent to a borrower in this re-spect, against such losses that exceed the amount invested, and can thus spillover into the other assets of the retail client, by adopting a product interven-tion measure. The present General Administrative Act is appropriate for pro-tecting protect retail clients against losses that exceed the amount paid bythe retail client into their trading accounts and thus spill over into to the otherassets of the retail clients.Contrary to the comments of petitioners, the market survey carried by BaFinrevealed that leverage of over 1,000 is also possible for retail clients in thecase of futures. In this case, the retail client only has to deposit one-thou-sandth of the actual investment total as collateral. Retail clients can do thisto move huge investment amounts with only a small stake, since only a frac-tion of the actual investment total has to be paid in and they do not haveready capital equal to the entire contract value. For retail clients, there istherefore a risk that they will lose capital that they did not have to hold at thebeginning of the investment, and which they may not have at all.Banning the additional payment obligation (paragraph 2(a) of the operative part) limits the risk of retail clients from essentially leveraged speculation, which has a particularly high risk potential according to the lawmakers’ as-sessment in Article 4(1)(3) of MiFID II, to the amount actually invested (pos-sibly plus a voluntary variation margin), and hence reduces the risk. If retail clients use futures as a hedging instrument and correspondingly holdthe underlying instrument or underlying transaction to be hedged, it can beassumed that this does not involve leveraged speculation.Note: Transposed into German law in section 2 (9) no. 2 of the WpHG.

Page 23 of 482.1.2.4 Selling practices and information providedEspecially since the CFD product intervention measure entered into force, fu-tures are regularly promoted by intermediaries to retail clients as an alterna-tive to CFD trading. These providers are evidently encouraging retail clientsto trade the futures for speculative purposes or generally pursuing the ob-jective of speculation. Reference is often made to the sometimes higher andtheoretically unlimited leverage in futures trading or this is part of the adver-tising strategy. This difference compared with CFDs is put in a positive light,often without mentioning the unlimited risk of loss.As in the case of CFD trading, some intermediaries rely on partner or affiliatemarketing in connection with futures. Bonus or discount promotions are alsoregularly used to win new clients. Affiliate partners advertise futures tradingon behalf of the intermediaries essentially indirectly. In return, affiliate part-ners receive a commission or bonus for each client they pass on to the inter-mediary. In some cases, payment of this commission is tied to various criteria,such as the number of contracts opened or the amount of the retail client’spaid-in capital.Affiliate advertisers regularly focus on retail clients who do not have the nec-essary level of knowledge and experience with futures transactions. In manycases, the way the risks are presented by the advertisers is inadequate, forexample it is rare for attention to be drawn to the risk of additional paymentobligations. In most cases, this affiliate advertising is also not identified assuch, but rather dressed up to look like an informative article or a comparisonportal.In particular mini and micro futures contracts are actively advertised. Theyare often are often described as being suitable for retail clients. This suitabil-ity for retail clients is often stressed. Retail clients could therefore get theimpression that these products are generally suitable for them or for conven-tional retail clients. As a rule, however, no reference is made to the risk of anadditional payment obligation. The advertisers’ target group is usually retailclients who pursue a speculative or trading strategy, and less those who pur-chase futures for hedging purposes.Overall, the advertisements draw a picture that in particular highlights theadvantages of futures trading for retail clients and is intended to make it at-tractive as an alternative investment especially for retail clients, reflecting themarket and product development of mini and micro futures. At the same

Page 24 of 48time, however, there is a growing danger that the unlimited risk of loss in-herent in the products – something which is completely atypical comparedwith other investment products – is often overlooked or underestimated, es-pecially by this less experienced client group.Particularly in times of low interest rates, retail clients are increasingly crowd-ing into the capital markets so they can still make profitable investments. Itcan therefore be assumed that products that theoretically offer high profitpotential appear to be increasingly attractive for retail clients. Awareness offutures is enhanced by appealing to or mentioning retail clients as a clientgroup and by targeted advertising activities aimed at them. This is leading toan increase in retail clients who are trading in these financial instruments andare exposed to the risk of an unlimited loss due to the additional paymentobligation. This is clearly shown and supported by the noticeably sharp in-crease in the number of clients who traded EUREX futures between 2018 and2021, based on the Article 26 MiFIR reporting data.This is how the selling practices described above are helping the number ofretail clients who trade in futures and can therefore potentially lose morethan their invested capital to increase further in future. In light of the increas-ing marketing activities with regard to micro and mini futures, which make iteasier overall for retail clients to enter the futures market, BaFin was able todetermine in an analysis of reporting data that the number of clients tradingin these forms of futures will also increase again in 2022 compared with theprevious year.Although Regulation (EU) No. 1286/2014 on key information documents for packaged retail and insurance-based investment products (the PRIIPs Regu- lation) requires futures manufacturers to prepare a key information docu-ment, or requires providers of futures to make this document available toretail clients, this does not eliminate the risk that retail clients may incur aloss in excess of their invested amount because of the additional paymentobligation.The reference to potential losses that have to be settled using private assetsdoes not prevent retail clients from having to make additional payments.Despite attention being drawn to the risk of an additional payment obliga-tion, this risk is regularly underestimated by retail clients.

Page 25 of 482.2 No sufficient other options to address the risks referred to in point(a) of the first sentence of Article 42(1) of MiFIR and to address the issue by improved supervision or by enforcing existing requirements(point (b) of sentence 1 of Article 42(2) of MIFIR)Existing regulatory requirements under EU law that are applicable to the mar-keting, distribution and sale of futures do not sufficiently address the risksreferred to in point (a)(i) of the first sentence of Article 42(2) of MiFIR. Neither the requirements of EU nor national requirements – as laid down in theWpHG, for example – can sufficiently address the risks to investors in con-nection with additional payment obligations for futures, as described above.In accordance with the requirements of point (b) of sentence 1 of Article 42(2) of MiFIR, BaFin has examined whether there are other sufficient other optionsto address the risks referred to in point (a) of sentence 1 of Article 42(2) of MiFIR and to address the issue by improved supervision or enforcement ofexisting regulatory requirements under EU law. The applicable existing regu-latory requirements are laid down in MiFID II, the Delegated Directive on Mi-FID II (EU) 2017/593, the Delegated Regulation on MIFID II (EU) 2017/565, MiFIR and Regulation (EU) No. 1286/2014 of the European Parliament and of the Council, as well as national implementing acts in the WpHG and the Reg-ulation Specifying Rules of Conduct and Organisational Requirements for In-vestment Services Enterprises (Verordnung zur Konkretisierung der Verhaltensregeln und Organisationsanforderungen für Wertpa-pierdienstleistungsunternehmen – WpDVerOV). These include the following requirements:2.2.1 Adequate provision of informationBaFin has examined whether the provisions on fair client information underArticle 24(3) and (4) of MIFID II sufficiently address the risks referred to inpoint (b) of the first sentence of Article 42(2) of MiFIR and whether the prob- lem would be better solved by improved supervision or enforcement of therequirements under those provisions. This is not the case.However, the rules aimed at ensuring transparency to the client are not suit-able for countering in particular the unlimited risk of loss inherent at least inshort futures. A transparent and understandable presentation of the unlim-ited risk of loss does not prevent retail clients from being exposed to the riskNote: Transposed into German law in section 63 (1) (6) and (7) of the WpHG.

Page 26 of 48of an additional payment obligation in futures trading. The provision of ade-quate information required by law in the sense of the above-mentioned legalrequirements cannot prevent the risk of a mandatory additional payment ob-ligation and hence the risk of a loss in excess of their invested amount thatretail clients will have to settle using their other assets.2.2.2 Suitability and appropriateness requirementsWhen they provide investment advice or portfolio management, Article 25(2) of MiFID II requires investment firms to obtain the necessary informationabout the knowledge and experience of the client or potential client in re-spect of transactions in certain types of financial instruments, about their fi-nancial situation, including their ability to bear losses, and about their invest-ment objectives, including their risk tolerance (suitability assessment). However, since the marketing, distribution and sale of futures is normallyperformed through electronic platforms without the provision of investmentadvice and portfolio management, and since retail clients therefore generallyremain unprotected by the related protection mechanisms in the area of veryrisky futures , recourse to Article 25(2) of MiFID II does not offer a sufficient other option to address the risks referred to in point (a) of the first sentence of Article 42(2) of MiFIR.In accordance with Article 25(3) of MiFID II, an assessment of the appropri-ateness of the financial instrument for the client is required when offeringfutures via electronic trading platforms without the provision of investmentadvice or portfolio management (“non-advised business”) (appropriateness assessment).For the assessment of appropriateness, the first subparagraph of Article 25(3) of MiFID requires investment firms to ask their clients or potential clients toprovide information regarding their knowledge and experience relevant tothe specific type of product or service offered or demanded so as to enablean assessment of whether the investment service or product envisaged is ap-propriate for the client. However, the financial instruments may be tradedwith the client after issuing a warning in accordance with the second subpar-agraph of Article 25(3) of MiFID II, even if the assessment of appropriatenessNote: Transposed into German law in section 64 (3) of the WpHG.Note: Transposed into German law in section 63 (10) of the WpHG. Note: Transposed into German law in section 63 (10) sentence 1 of the WpHG.Note: Transposed into German law in section 63 (10) sentence 3 of the WpHG.

Page 27 of 48has previously led to the conclusion that the financial instrument is not ap-propriate for the client or potential client. Similarly, the financial instrumentsmay also be traded with the client in accordance with the third and fourthsubparagraphs of Article 25(3) of MiFID II after issuing a simple warning tothe client in cases where the client has not previously provided any infor-mation or has provided only inadequate information and an assessment ofappropriateness is therefore not possible. In such cases, the client mustmerely be informed accordingly.As a result, even a proper appropriateness assessment cannot prevent therisk of an additional payment obligation and thus a potential loss exceedingthe amount invested. Even retail clients who have the appropriate experienceand knowledge must also bear the risk of being obliged to make unlimitedadditional payments, which they may have to pay out of their other assets.An assessment of the appropriateness of the financial instrument for the re-tail client therefore does not reduce the potential risk of losses exceeding theamount invested. Furthermore, failure to identify appropriateness does notautomatically exclude the retail client from the envisaged transaction.There is therefore not any sufficient other option for countering the risks de-scribed above and for addressing the issue by improved supervision or en-forcement of existing requirements by means of an effective suitability orappropriateness assessment.2.2.3 Product monitoringBaFin has also examined whether the provisions governing product monitor-ing in accordance with Article 24(2) of MiFID II, the fourth subparagraph ofArticle 16(3) of MiFID II and Articles 9 and 10 of Commission DelegatedDirective (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguardingof financial instruments and funds belonging to clients, product governanceobligations and the rules applicable to the provision or reception of fees,commissions or any monetary or non-monetary benefits sufficiently ad-dress the risks referred to in Article 42(2)(1)(b) of MiFIR and whether the Note: Transposed into German law in section 63 (10) sentences 3 and 4 of the WpHG.Note: Transposed into German law in section 63 (4) and (5) of the WpHG.Note: Transposed into German law in section 80 (9) of the WpHG.Note: Transposed into German law in section 81 (4) of the WpHG and sections 11 and 12 of the WpDVerOV.

Page 28 of 48problem would be better solved by improved supervision or enforcement ofthe requirements of these provisions.When manufacturers and distributors of financial instruments identify a tar-get market, together with other features, they must specify the client cate-gory (retail client, professional client or eligible counterparty) with which the financial instrument is compatible. Because of the features of futures, BaFinbelieves that the particular consideration must be given to retail clients whenidentifying the target market for these financial instruments. The client cate-gory of retail clients who do not trade in futures for hedging purposes mustbe excluded from the target market.Counter to the views of the petitioners, BaFin’s efforts to consistently enforcethe product monitoring requirements cannot also be equivalent to the re-striction set out in this General Administrative Act for preventing retail clientsfrom losing more than their invested capital through futures. Target marketidentification, meaning ruling out retail clients from the positive target mar-ket or including retail clients in the negative target market, could certainlybe used to ensure that futures traded for speculative purposes are not dis-tributed to retail clients.However, this is an insufficient option for BaFin to act: it indirectly requiresseveral intermediate steps which have to be monitored in each individualcase in further various intermediate steps and, if necessary, enforced by indi-vidual measures if the compliance by the undertakings concerned at theirown responsibility fails. In addition, it can be expected that, nevertheless, fur-ther retail clients will purchase futures for speculative purposes and that therewill continue to be a risk that retail clients will suffer losses in excess of theirinvested amount.With the present General Administrative Act, BaFin is directly creating stand-ardised requirements and a consistent level of protection for retail clients inGermany against the risk of being required to make additional payments infutures trading that must be paid out of other assets, unless these transac-tions are being used for hedging purposes. The General Administrative Act isthe most efficient way to achieve the required level of protection and to elim-inate the significant investor protection concerns described above. By con-trast, target market identification would not be an equally suitable moremoderate means. See BT 5.4.1 in Circular 5.4/1 (WA) – Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency (MaComp).

Page 29 of 482.2.4 Key information documentsArticles 5 to 14 of Regulation (EU) No. 1286/2014 (PRIIPS Regulation) contain disclosure requirements. The Regulation lays down uniform rules on the for-mat and content of key information documents that manufacturers of pack-aged investment products and insurance-based investment products mustprovide to retail clients so that they can understand and compare the keyfeatures and risks of a PRIIP (packaged retail and insurance-based investment product). In particular, Article 5 of the PRIIPs Regulation, which has been further clari-fied in Commission Delegated Regulation (EU) 2017/653, lays down, among other things, a methodology for presenting the summary risk indicator andaccompanying explanations, including information on whether retail clientscan lose all of the invested capital or whether they incur additional financialobligations. However, this type of disclosure does not prevent the risk of ad-ditional payment obligations for retail clients. Contrary to the petitioners’ as-sumption, this risk cannot be eliminated by increased supervision of the keyinformation documents.A more transparent presentation of the additional payment risk is thereforenot a suitable means. The PRIIPs Regulation does not contain any require-ments over and above this that would eliminate or sufficiently address theissue.2.2.5 Voluntary measures by intermediariesThe measures already established in part by intermediaries, such as increas-ing the margin requirement specified by the futures exchange in the clientrelationship by a certain percentage, cannot, in an overall assessment, elimi-nate the significant investor protection concerns to the extent that no prod-uct intervention measure is necessary.Requiring intermediaries to have reliable margin call procedures, as sug-gested by petitioners, cannot have any effect here either.This is because the margin call procedure can only limit the risk of an addi-tional payment obligation conditionally and cannot do so not reliably. Espe-cially in situations where the price fluctuations of an underlying instrumentare so high that the intermediary has no time for a margin call and the posi-tion or contract has to be forcibly closed out, this instrument does not suffi-

Page 30 of 48ciently protect retail clients. This is because even liquidating an existing po-sition to limit losses can be significantly delayed to the detriment of the clientif there are considerable market fluctuations. Additionally, the intermediariesare not obliged to launch a margin call procedure and structure the relevantprovisions differently in their general terms and conditions.2.2.6 Interim outcomeWithout restricting futures trading through product intervention under Arti-cle 42 of MiFIR, the significant investor protection concerns cannot be elimi-nated in the same way by enforcing the requirements described above.BaFin therefore takes the view that there is no sufficient other option to coun-ter the risks referred to in point (a) of the first sentence of Article 42(2) of MiFIR and to address the issue through improved supervision or enforcementof the existing requirements. Nor can the voluntary investor protectionmeasures adopted by intermediaries limit the risks of additional payment ob-ligations to such an extent that there are no significant investor protectionconcerns.The restrictions on the marketing, distribution and sale of futures to retailclients enacted with this General Administrative Act are therefore necessaryto avert the significant investor protection concerns described above.2.3 Consultation of competent authorities of other Member StatesAs a precaution, the competent authorities of other Member States have alsobeen consulted by BaFin about the present measure under Article 42(2)(d) of MiFIR.A significant concern within the meaning of the provision may arise from thelocation of the registered office of intermediaries or futures providers in otherMember States if they offer futures to retail clients in Germany on a cross-border basis. However, the measure is solely restricted to the marketing, dis-tribution and sale of futures in Germany to retail clients domiciled in Ger-many, As a result, offering these instruments in other Member States is notaffected, at least not directly.2.4 No discriminationThe product intervention measure restricts the marketing, distribution andsale of futures by prohibiting the marketing, distribution and sale of futures

Page 31 of 48to retail clients domiciled in Germany, subject to certain exceptions, and doesnot discriminate against services provided or offered from another (EU) Member State (Article 42(2)(e) of MiFIR). With regard to futures, there are significant investor protection concerns that justify a product interventionmeasure under Article 42 of MiFIR across the entire geographical scope ofapplication. The free movement of capital is not restricted. The product in-tervention that is the subject of this General Administrative Act neither di-rectly refers to the nationality of the addressees nor does it lead de facto toany discrimination with regard to the source of the capital, so that there is nonationality-based unequal treatment.2.5 There is no significant risk to physical agricultural marketsUnder Article 42(2)(f) of MiFIR, the public bodies competent for the oversight, administration and regulation of physical agricultural markets under Regula-tion (EC) No. 1234/2007 must be properly consulted by BaFin before adopt- ing a product intervention measure under Article 42 of MiFIR if a financialinstrument or activity or practice poses a serious threat to the orderly func-tioning and integrity of physical agricultural market. This is not the case here.This product intervention measure is justified by the existence of significantinvestor protection concerns within the meaning of Article 42(2)(a)(i) variant 1 of MiFIR. In BaFin’s opinion, however, the marketing, distribution and saleof futures to retail client does not, in principle, pose a threat to the orderlyfunctioning and integrity of the financial or commodity markets within themeaning of Article 42(2)(a)(i) variant 2 of MiFIR. There was therefore no need in the present case for a formal consultation ofthe bodies responsible for the supervision, administration and regulation ofthe agricultural commodity markets. Nevertheless, the Federal Ministry ofFood and Agriculture (BMEL) was informed about the planned product inter-vention measure during the consultation procedure and given an oppor-tunity to comment.2.6 Exercise of discretion2.6.1 Discretion with regard to the adoption and content of the measureI have exercised the discretion granted to me under Article 42(1) of MiFIR in the sense of adopting the above-mentioned measure. The measure is pro-portionate because it is suitable, necessary and appropriate.

Page 32 of 48The measure is a restriction, since futures may continue to be marketed, dis-tributed and sold, taking into account the exceptions addressed in paragraph2 of the operative part. BaFin is therefore not completely prohibiting futurestrading, but is merely restricting it.2.6.1.1 Suitability of the measureThe restriction on the marketing, distribution and sale of futures is suitablefor achieving the legitimate purpose of the measure. Article 42 of MiFIRserves to protect collective investor protection interests. The measure is suit-able for addressing the significant investor protection concerns describedabove.Restricting the marketing, distribution and sale of futures to retail clientsdomiciled in Germany results in the specific investor protection concerns de-scribed above being eliminated.2.6.1.2 Necessity for the measureThe measure is also necessary in the scope stated in the enacting part. Nomore moderate measure is available to me that would be equally appropriatefor addressing the existing significant investor protection concerns.In particular, the restriction is a more moderate measure than a completeprohibition on the marketing, distributing and sale of futures. The restrictiononly applies to those futures that can be marketed, distributed or sold byintermediaries to the retail client investor group without the exclusion of theadditional payment obligation or that are not demonstrably acquired by re-tail clients for hedging purposes. In addition, the General Administrative Actdoes not apply to futures that are acquired to close out a corresponding po-sition that is open at the time General Administrative Act enters into force. Incontrast to a complete prohibition, the restriction also allows retail clients tocontinue trading in futures (either without additional payment obligations or for hedging purposes) and ensures that the significant investor protection concerns described above are sufficiently limited.Merely strengthening the general information provided to retail clients byproviders or manufacturers of futures about the risks associated with tradingin futures, in particular the risk of losses exceeding the amount invested, can-not be considered to be a more moderate measure. Even total transparencyabout possible additional payment obligations and awareness of them does

Page 33 of 48not eliminate the risk for retail clients of losing more than their invested cap-ital. And comprehensive education about the functioning, effect and dangersof a product cannot change its concrete design and the resulting risks. Inparticular, it cannot prevent retail clients nevertheless continuing to trade infutures. This is also the case in relation to the education and screening pro-cedures for futures trading called for by petitioners in the course of the con-sultation. Even some confirmation of theoretical knowledge about the risk ofadditional payment obligations does not protect retail client from this risk tothe same extent as the restriction ordered in this General Administrative Act.For this reason, even more in-depth educational and training measures arenot suitable in the same way for countering the risks of an additional pay-ment obligation outlined above. This would also apply to a correspondingwarning by BaFin.Additionally, any restriction such that futures can solely be purchased in con-junction with investment advice or portfolio management would not be ap-propriate to the same degree for preventing retail clients from having to bearthe risk of the additional payment obligation inherent in the product andthus an unlimited risk of loss. Regardless of how futures are purchased, therisk of additional payments obligations still exists for retail clients.Similarly, reducing leverage in futures trading or, alternatively, increasing themargin demanded by the futures exchange, would not be appropriate forcountering the risk of unlimited additional payment requirements. A cap onthe leverage permitted to retail clients through associated higher marginpayments would reduce the risk of additional payment obligations, but itwould not completely exclude them. In the case of higher volatility and higherstakes, the additional payment obligation can lead to incalculable risks of lossfor the retail client, even if leverage is limited. In addition, a regulatory lever-age limitation would also interfere with the professional freedom of providersand limit the investment opportunities open to retail clients. This also appliesto any increase in the variation margin, which at best postpones the risk thatadditional payments will be required, since a security buffer is deposited thatcan be used. Both alternatives are therefore not appropriate in the same wayas the restriction set out in the operative part for eliminating the risks inher-ent in the product that may arise from the additional payment obligation andfor preventing retail clients from losing far more money than they actuallyinvest and have available for trading.Contrary to the assumption of the petitioners, even a mandatory margin callprocedure would only give retail clients the opportunity to avoid or delay

Page 34 of 48forced liquidation by paying in additional funds, but would not be appropri-ate for generally protecting them from the additional payment obligation.Additionally, in the event of sudden, extreme price fluctuations – especiallyblack swan events – it is to be expected that the margin call would mostlyprove to be futile because only a few seconds – if any – would remain to reactand provide further capital (see also 2.2.5). Any inability to meet the addi-tional payment obligations promptly results in the automatic liquidation ofthe futures position. However, this specifically does not guarantee that theretail client’s losses would be limited to their trading balance.A purely marketing restriction, for example in the form of a prohibition onactively marketing futures, is also not an equally suitable means. Futures aremostly advertised and sold online, including across borders. Such a prohibi-tion would only apply to advertising measures that are aimed at the Germanretail client market. This means that providers would still be able to distributedemo accounts, advertising videos, success stories, etc. online in German, forexample by aiming them (solely) at Austrian retail clients. Overall, this sort of restriction or prohibition on advertising would by itself have only a very minoreffect in protecting investors if purchasing futures were to continue to bepermitted without restriction for retail clients. Nor would this in any waychange the additional payment obligation and the resulting risks for retailclients.In principle, limiting the measure solely to less experienced retail clients maybe considered as a more moderate measure. However, it would not beequally suitable for achieving the objective pursued by this General Admin-istrative Act. Retail clients who already have some trading experience are ex-posed to the incalculable risks of loss resulting from the additional paymentobligation. Extreme volatility events can occur at discontinuous intervals andthus lie outside the horizon of experience of the retail client. The lawmakershave already taken into account the experience, knowledge and expertise ofclients through the criteria in Article 4(1)(10) of MiFID II in conjunction with Annex II(II.1) of MiFID II and clarified that classification as a professionalclient is only possible if at least two of these criteria relating to experienceand knowledge are met. There is therefore no reason to disregard this statu-tory assessment and – as called for by petitioners – to introduce an additionalsubclassification of the group of retail clients or lower classification thresh-olds.Note: Transposed into German law in section 67 (6) nos. 1 and 3 of the WpHG.

Page 35 of 48In principle, restricting the measure to retail clients who are natural personscan be considered as a more moderate measure, but, contrary to the assump-tion of some petitioners, it is not suitable for addressing the identified signif-icant investor protection concerns in the same way.In Article 4(1)(10) and (11) of MiFID II, the lawmakers make a distinctionbetween the retail client or private client and the professional client catego-ries. By doing so, the lawmakers deliberately also include legal entities thatdo not meet certain criteria under Annex II(1)(2) of MiFID II in the categoryof retail clients deserving protection. The General Administrative Act there-fore also covers these legal entities.Even in cases where the shareholder’s liability is limited, for example in thecase of a GmbH (limited liability company), the risk that the company will become insolvent or the risk that it will not be able to financially shoulderany loss exceeding the invested assets is significantly increased, especially inthe case of small corporations or associations. In addition, those legal entitiesthat trade futures for hedging purposes and are thus already protected to acertain extent are already exempted from the restriction by paragraph 2(b) of the operative part.Contrary to the arguments of some petitioners, restricting the product inter-vention measure to a prohibition on short futures transactions for retail cli-ents in Germany is also not a more moderate means. Although such a prohi-bition would ensure that retail clients do not lose more than the contractvalue of the future in such transactions and thus do not suffer unlimitedlosses, the loss would still not be limited to the amount they have investedvoluntarily. Retail clients could thus trade futures contracts with high lever-age, and thus potentially high contract sizes, with relatively low stakes. Spec-ulating on credit would still be possible and retail clients could continue tolose many times their invested amount. Restricting the measure solely toshort transactions would not have the same protective effect as the re-striction set out in the operative part, and is thus not an equally suitable,more moderate means. The same applies to restricting the loss to the con-tract value.Restricting the product intervention measure to “particularly risky futures”, assuggested by petitioners, also does not constitute an equally suitable moremoderate means. Less risky futures usually have higher leverage due to the Note: Transposed into German law in section 67 of the WpHG.Note: Transposed into German law in section 67 (2) sentence 2 no. 2 of the WpHG.

Page 36 of 48inverse relationship between volatility or risk and leverage. They enable retailclients to trade high contract values even with limited funds (speculation on credit). It is beyond dispute that the risk of additional payment obligations in futurestrading exists regardless of the underlying instrument in question. In the past,it was also evident that relatively low volatility underlyings were subject tohigh fluctuations in extreme situations and led to additional payments. It isprecisely the characteristic feature of black swan events that they cannot bepredicted or calculated. Although an extreme price change is unlikely for cur-rent indices, for example, the risk of additional payment obligations cannotbe ruled out even for less risky underlyings to be determined anew for eachindividual future. As a result, any restriction to “particularly risky futures”would not be equally suitable.There is no extensive coverage of the market to the extent that providershave taken it upon themselves to exclude additional payment obligations forinvestor protection reasons or only enable futures trading for hedging pur-poses, thereby taking into account the significant investor protection con-cerns such that deferral of the measure could be justified. This was also con-firmed during the public consultation on the product intervention measure.Contrary to the arguments brought forward by petitioners in the consultationprocedure, the merits of the measure were sufficiently clarified in accordancewith section 24 of the VwVfG. The considerable investor protection concernsdescribed above arise here from inherent characteristics of futures. As a re-sult, the risk from additional payment obligations is undisputed. Apart fromthis, there were already obligations in the past, as explained above, for retailclients to make substantial additional payments in futures trading. It can alsobe expected that there will be a growing number of additional payment ob-ligations in future, driven by the further growth in trading volumes.This is also confirmed by BaFin’s market survey: both the number of retailclients trading in futures and the volume they are trading are growing stead-ily. In addition, intermediaries and other market participants are anticipatingfurther growth in this market for retail clients. It can be assumed that withthe growth of the market, which is being fuelled by the creation of new prod-uct forms (mini or micro futures) and advertising activities of the intermedi-aries (affiliate marketing), the potential group of retail clients affected by ad- ditional payment obligations will also increase and thus the number of addi-tional payments obligations will grow in the future.

Page 37 of 482.6.1.3 Proportionality of the measure in the narrower sense(appropriateness)Restricting the marketing, distribution and sale of futures to retail clientsdomiciled in Germany to the extent specified in the operative part is alsoappropriate.It addresses the significant investor protection concerns described above byenabling an appropriate and consistent level of protection through guaran-teed protection of the level of losses for retail clients who trade in futures inGermany for speculative purposes. It does not have any detrimental effect onthe efficiency of financial markets, on providers, intermediaries or investorsthat is disproportionate to the benefits.As part of the appropriateness assessment, an overall assessment must bemade to weigh all the interests involved. In particular, according to Arti-cle 42(2)(c) of MiFIR, the extent and nature of the significant concerns iden- tified with regard to investor protection, the level of sophistication of theinvestors or market participants concerned and the economic interest of theaddressees, as well as the likely effect of the measure on investors and marketparticipants, must be taken into account in this assessment.With regard to the retail clients protected by the measure, it should also beconsidered – in addition to investor protection concerns – that the lawmakersattach particular importance to the protection of collective consumer inter-ests. Under section 4 (1a) of the Act Establishing the Federal Financial Super-visory Authority (Finanzdienstleistungsaufsichtsgesetz – FinDAG), BaFin is obliged to protect the collective interests of consumers within its legal man-date. This legal mandate must be seen in the light of the economic im-portance of collective consumer protection.In particular because of the additional payment obligation, there is a signifi-cant disparity between the expected profit and the risk of loss in unrestrictedfutures trading. Additionally, calculating the performance of futures is verycomplex and does not correspond to the typical level of knowledge to befound among retail clients.For the reasons set out in the following, the public interest in collective in-vestor protection and, additionally with regard to private individuals in col-lective consumer protection, outweighs the economic interest of the inter-

Page 38 of 48mediaries and other market participants in the unrestricted marketing, distri-bution and sale of futures to retail clients domiciled in Germany, as well asthe individual interest of retail clients in purchasing futures.2.6.1.3.1 Impact of the measure on the parties concernedSpecifically:2.6.1.3.1.1 Impact of the measure on the addresseesThe General Administrative Act will adversely affect the economic interest ofintermediaries in the marketing, distribution and sale of futures to retail cli-ents domiciled in Germany. Specifically, intermediaries may incur costs to im-plement the General Administrative Act, for example IT costs, consultingcosts and costs in connection with updating their terms and conditions. Inaddition, it can be expected that intermediaries will hedge the market riskthey assume in the amount of the additional payment obligation if they haveto rule out the additional payment obligation in their contractual relationshipwith the retail client, which could cause additional costs for the intermediar-ies. However, these costs are not expected to arise to any considerable ex-tent, especially because it is assumed that intermediaries will pass on the ad-ditional costs to retail clients, at least in part. For this reason, the relevantaddressee interests must be subordinated.In addition, BaFin’s market survey showed that it is certainly possible to ruleout the additional payment obligations at the level of the business relation-ship between the retail client and intermediary, and offering futures withoutadditional payment obligation or used only for hedging purposes continuesto appear economically viable for intermediaries.Further, in light of paragraph 2(b) of the operative part, providers may incur further costs in implementing the General Administrative Act. For example,investment firms must establish procedures to document confirmation by theretail client for hedging transaction execution. However, the possible costburden for providers due to the requirements of paragraph 2(b) of the oper-ative part is proportionate, as it enables investment firms to continue mar-keting, distributing and selling futures for hedging purposes to retail clientsdomiciled in Germany. The measure is a more moderate means comparedwith an outright prohibition.Furthermore, the futures covered by the restriction in the operative part ofthis General Administrative Act can continue to be distributed without any

Page 39 of 48restriction to professional investors within the meaning of Article 4(1)(10) of MiFID II.It must also be considered that paragraph 2 of the operative part of the Gen-eral Administrative Act provides for exceptions, so that marketing, distrib-uting and selling futures to retail clients domiciled in Germany are thereforenot entirely prohibited. Futures can continue to be marketed, distributed andsold to retail clients in Germany if investment firms contractually exclude anyadditional payment obligation or retail clients confirm to the investment firmthat they are trading the futures for hedging purposes. There is therefore noneed for intermediaries to make any changes to their business model, andthe expense incurred will be limited to making design, organisation and legaladjustments affecting futures in relation to the client group of retail clients.Restricting or prohibiting marketing, distribution and sale are interventionoptions open to BaFin as provided for by the lawmakers in point (a) of Arti-cle 42(1) of MiFIR. When introducing these intervention options, the lawmak- ers were aware that intervention could have economically adverse conse-quences for the affected providers. The lawmakers deliberately acceptedthese potential consequences in favour of better investor protection. Accord-ing to the assessment by the lawmakers, the financial interests of the provid-ers are subordinated in this respect to the interests of affording protectionof retail clients.Moreover, one of the main reasons that the financial sector is highly regu-lated is that it serves wider interests and objectives. The lawmakers give highpriority to investor protection. Particular attention is paid to protecting in-vestors in this context. According to this assessment by the lawmakers, themarketing, distribution and sale of a financial instrument should only be pos-sible to the extent that a product is at least potentially able to serve thosewider interests and objectives, and that the need to ensure a minimum levelof investor protection is not disproportionately jeopardised by the product.By participating in the capital market, typical retail clients primarily pursuethe purpose of capital accumulation. This is basically a savings or investmentprocess. Financial instruments that inherently have both an unpredictableand unlimited potential for losses are therefore fundamentally incompatiblewith this and should be considered to be detrimental to investor protection.However, the significant investor protection concerns described above clearlyshow that there is a risk that retail clients will lose more than their investedcapital.

Page 40 of 48For these reasons, the economic interest of investment firms in the unre-stricted marketing, distribution and sale of futures to retail clients domiciledin Germany must be considered less deserving of protection because of thepublic interest in collective investor protection and, additionally with regardto private individuals in collective consumer protection, and must be subor-dinated to the significant investor protection concerns described above.2.6.1.3.1.2 Effects of the measure on other market participantsThe present measure is also proportionate in respect of other market partic-ipants.The General Administrative Act affects a limited group of addressees and isaddressed to investment firms within the meaning of Article 1(1) of MiFID II, in conjunction with Article 4(1)(1) of MiFID II, that market, distribute or sell futures to retail clients domiciled in Germany. However, other market partic-ipants who are not investment firms may also be affected, at least indirectly,by the product intervention measure.Specifically, these may be market operators as well as manufacturers of fu-tures. Up to now, futures exchanges do not have any direct legal relationshipwith retail clients, so they are not prevented from offering futures to theirprofessional clients (and eligible counterparties), as they have been doing until the present day. Moreover, trading in futures by retail clients who tradefutures indirectly via intermediaries on futures exchanges represents only afraction of the total volume of trading, so that even in the event of decliningdemand for futures contracts, the economic impact of such a restrictionwould be marginal.Similarly, any costs that may be incurred from the need to adapt informationand promotional material in relation to the target group of retail clients arenot decisive compared with the importance of the uniform level of protectioncreated by the present measure through limiting the risk of loss.Any significant effects of the General Administrative Act on the financial sec-tor as a whole can be ruled out. The interdependence between the retail cli-ent market for futures and other capital markets and the effects on stockexchange trading are low. Even assuming that the futures market for retailclients will continue to grow in future, effects of the measure on other mar-kets can be ruled out.

Page 41 of 48BaFin already recognised that no such effects occurred on the market whenit banned additional payment obligations in CFD trading through its GeneralAdministrative Order dated 8 May 2017. Since the largely uniform EuropeanCFD product intervention measure of 23 July 2019 took effect, no relevanteffects on other capital markets were observed either in Germany or in theEU. This can also be assumed in the present case.Overall, the benefits of eliminating the identified investor protection con-cerns outweigh the potential negative impact of the measure on other mar-ket participants.2.6.1.3.1.3 Impact of the measure on investorsThe impact of the measure on retail clients is proportionate.The restriction relates to the marketing, distribution and sale of futures toretail clients domiciled in Germany, It should be considered that individualretail clients must decide for themselves whether futures are an investmentthat is suitable for them, taking into account their individual life situation andfinancial situation. The General Administrative Act restricts this autonomy be-cause it at least indirectly limits the freedom of action of retail clients. How-ever, this limitation is proportionate because the impact of the General Ad-ministrative Act on retail clients remains highly restricted.Futures can continue to be made accessible to retail clients domiciled in Ger-many if, pursuant to paragraph 2 of the operative part, investment firms con-tractually exclude additional payment obligations by retail clients or retail cli-ents trade futures for the purpose of hedging transactions. Additionally, theGeneral Administrative Act does not apply to futures that are acquired toclose out a corresponding position that is open at the time the General Ad-ministrative Act enters into force. Retail clients as defined in Article 4(1)(11) of MiFID II are thus not entirely prevented from accessing futures.On the other hand, it cannot be ruled out that the measure will lead to mod-ifications in futures trading (in the wider sense), as intermediaries can ex- pected to hedge against the market risk they assume in the amount of theadditional payment obligation. As part of their risk management, intermedi-aries would above all incur ongoing costs as a result of additional capitalrequirements or hedging transactions, some of which could be passed on toinvestors. In some cases, as well as limiting the choice of underlying instru-ments, this may also lead to higher minimum balances on trading accounts,

Page 42 of 48a leverage limit or higher product costs. The restriction could affect retail cli-ents at least indirectly in this respect. However, futures already offered on themarket for which an additional payment obligation by retail clients is con-tractually excluded by the intermediary demonstrate that the product con-tinues to be available to retail clients and that the measure will not signifi-cantly restrict their freedom to make investment decisions. Retail clients cantherefore continue participating indirectly in the futures market without ex-posure to incalculable risks of loss as a result of the additional payment ob-ligation.A product intervention measure necessarily leads to a certain limitation ofinvestment opportunities, but this is in line with the lawmakers’ intention.Article 42 of MiFIR is supposed to provide BaFin with an opportunity to in-tervene if there are significant investor protection concerns.Moreover, if the legal requirements are met, a retail client may be classifiedas a professional client and be granted access to unrestricted futures afterobtaining this status. Classification as a professional client under Article4(1)(10) of MiFID II is open to retail clients if their experience, knowledgeand expertise allows them to make investment decisions and thus adequatelyassess the associated risks. According to the lawmakers’ intention, a changein the classification may only be considered if at least two of the criteria re-ferred to in Annex II(II.) to MiFID II are met. This subclassification is appro-priate because it can be assumed in the case of such investors that they havethe necessary knowledge and experience as well as sufficient financial meansso that they can adequately assess and bear the risks associated with financialinstruments, in particular the risks or the likelihood and extent of any addi-tional payment obligation.Overall, the benefits of eliminating the identified investor protection con-cerns outweigh the potential negative impact of the measure on investors.2.6.1.3.2 Appropriateness in relation to paragraph 2 of the operative partParagraph 2 of the operative part governs exceptions from the prohibitionon marketing, distributing and selling futures to retail clients domiciled inGermany and thus also takes into account the objections raised in the con-sultation procedure.Note: Transposed into German law in section 67 (6) of the WpHG. Note: Transposed into German law in section 67 (6) nos. 1 to 3 of the WpHG.

Page 43 of 48The conditions of the exceptions under paragraph 2 of the operative part arealso appropriate because they ensure an appropriate balance between theaffected interests of providers and individual retail clients on the one hand,and the public interest in protecting the collective interests of investors onthe other.The exclusion of the additional payment obligation creates a uniform level ofprotection retail clients who do not trade futures for hedging purposes, withfutures trading no longer involving existential risks for them. Retail clients cancontinue to purchase futures (with additional payment obligations) if they are used for hedging purposes. Retail clients can also continue to purchasefutures for speculative purposes if the investment firm contractually excludesan additional payment obligation for the retail client. Under a provision gov-erning additional payments (paragraph 2(c) of the operative part), retail cli-ents can also acquire futures with additional payment obligations if theyserve solely to close out a corresponding futures position or a futures con-tract that was entered into before the General Administrative Act entered intoforce. Specifically, the need to protect retail clients as a whole outweighs anynegative impact on the interests of futures providers, other market partici-pants and individual retail clients.Both the contractual exclusion of the additional payment obligation and therequirement of confirmation of the hedging purpose of the futures positionare aimed in particular at protecting retail clients from unlimited and incal-culably high losses. The presence of such circumstances is to be assumed inparticular if there is an unforeseen change in the price of the underlying in-strument that is of such an extent that it is no longer possible for the providerto close out the position (without any gains or losses). In addition, there must be a negative balance on the retail client’s account as a result of the pricechange with the result that, after such events, clients owe considerably morethan they had originally invested. This additionally applies in particular ifthere are exceptional circumstances (significant market fluctuations). Specifically:2.6.1.3.2.1 Contractual conclusion of the additional payment obligationThe purpose of the contractual conclusion of the additional payment obliga-tion under paragraph 2(a) of the operative part is to ensure that the maxi-mum losses that will be incurred by a retail client from speculative trading infutures, including all the associated costs, are limited to the total amountfunds held for futures trading in the retail client’s futures trading account. A

Page 44 of 48retail client who is not hedging a real underlying may not incur any additionalliabilities in connection with speculative futures trading, as this would resultin a significant drawback for investors. Such a situation is particularly detri-mental for retail clients without any appreciable liquid assets.A retail client may not incur any additional liabilities in connection with theirfutures trading. Other accounts may not be part of the investor’s capital ex-posed to risk. If a trading account also includes other financial instruments(for example, CFDs or options), only the retail client’s funds explicitly allo- cated to futures trading are at risk, and not the funds for trading in otherfinancial instruments.In this respect, the measure provides the necessary level of protection forretail clients against potential losses that exceed their “other assets”, in par-ticular in times of significant market volatility.The contractual exclusion of additional payment obligations at the level ofthe intermediary directly protects the retail clients from additional paymentobligations. Retail clients can continue to trade futures if additional paymentobligations are contractually excluded by the investment firm. This sort ofexclusion ensures that retail clients cannot incur additional payment obliga-tions in connection with futures trading, addresses the identified significantinvestor protection concerns and is proportionate.2.6.1.3.2.2 Exception for retail clients’ hedging transactionsThe confirmation by the retail client that the future is being acquired forhedging purposes aims to ensure that retail clients who state that they arealready sufficiently protected themselves because they own negative corre-lating assets (financial instruments, commodities) can continue to trade fu-tures without any additional “safety net”. If futures are traded for hedgingpurposes, the risk resulting from the additional payment obligation does notexist to the same extent. It can therefore be assumed that losses from thefutures transaction or any additional payment obligations will be offset bycorresponding gains or proceeds from the underlying.Only a confirmation by the retail client enables investment firms to decidewhether the retail client may only purchase futures with a higher level of pro-tection or whether the exclusion of the additional payment obligation can bewaived in the specific individual case.

Page 45 of 48For example, this confirmation could be designed using the following tem-plate and integrated into the intermediary’s order screen in the case of elec-tronic order placement:“I hereby certify that this futures transaction is being enteredinto exclusively for hedging purposes and that I bear the riskof any additional payment obligations.”The retail client would then only have to confirm this statement with a clickin the electronic order screen. In the case of phone orders, the retail clientcould confirm the hedging purpose orally if it has not been made in any otherway before the transaction is entered into. This exemption from the re-striction on marketing, distribution and sale allows retail clients to continueto enter into hedging transactions in futures as before.If the confirmation is not made, futures may not be marketed, distributed orsold to retail client domiciled in Germany unless the investment firm has al-ternatively contractually excluded any additional payment obligation.The conditions of the exemption under paragraph 2(b) of the operative part are thus also proportionate as they ensure an appropriate balance betweenthe affected interests of providers and retail clients on the one hand, and thepublic interest in protecting the collective interests of investors on the other.2.6.1.3.2.3 Exception for closing out open futures positionsThe exception in paragraph 2(c) of the operative part exempts futures trans-actions from the prohibition on marketing, distribution and sale to retail cli-ents domiciled in Germany that are purchased exclusively for the purpose ofsettling an existing futures position opened prior to the entry into force ofthis General Administrative Act.This exception ensures that, even after the end of the three-month transi-tional period, retail clients will be able to close out open futures positions viaa corresponding offsetting transaction. However, the exception only appliesto futures positions opened by retail clients before the General Administra-tive Act enters into force.This exception is proportionate, because it takes into account the interest ofretail clients in the settlement of futures positions already opened before the

Page 46 of 48General Administrative Act enters into force and avoids negative conse-quences that could arise from the fact that retail clients may no longer beable to close them out with a corresponding offsetting transaction.2.6.2 Selecting the addresseesThe restriction on the marketing, distribution and sale of futures to retail cli-ents domiciled in Germany is ordered in the form of a General AdministrativeAct within the meaning of section 35 sentence 2 of the VwVfG.The addressees of the General Administrative Act are both investment firmswithin the meaning of Article 1(1) of MiFID II in conjunction Article 4(1)(1) of MiFID II that have their registered office in Germany and market, distributeor sell futures to retail clients domiciled in Germany or intend doing so in thefuture, and those that have their registered office in another Member Stateof the EEA and market, distribute or sell futures to retail clients domiciled inGermany or intend doing so in the future.The restriction therefore does not apply to investment firms whose registeredoffice is in Germany that market, distribute or sell futures to retail clients ex-clusively in other EEA Member States.The restriction also does not cover market operators or manufacturers of fu-tures. These fall within the scope of MiFID II and MiFIR and could thereforealso be the addressee of a product intervention measure under Article 42 ofMiFIR. However, it is primarily intermediaries who are being selected as ad-dressees, since only they give the client group of retail clients to access fu-tures trading within the framework of principal broking services, and the reg-ulatory objective is achieved solely by restricting the ability of investmentfirms to market, distribute and sell futures. The adoption of the measure re-lating to investment firms as set out in the operative part is therefore themost efficient means of achieving the level of protection with regard to fu-tures trading by retail clients domiciled in Germany.The General Administrative Act is addressed to a group of addressees thatcan be defined but is not objectively known at the time of adoption of themeasure. Although the majority of intermediaries whose registered office isin Germany are already known to BaFin from the market survey or the con-sultation procedure, it is also possible that this group has grown larger in themeantime, will grow larger in the future, and that further intermediaries willoffer retail clients futures or distribute them to their clients as part of principalbroking services. This applies in particular to foreign investment firms that

Page 47 of 48market, distribute or sell futures to retail clients across borders through thefree movement of services in the EEA.This is the only way of ensuring a uniform level of protection for retail clientsin Germany. Regardless of the origin of the provider and the commencementof the marketing, distribution and sale of futures, retail clients in Germanycannot purchase futures with additional payment obligations for speculativepurposes in Germany.2.7 Implementation periodParagraph 1. of the operative part sets an implementation deadline of threemonths after adoption of the measure. This time limit is reasonable.Taking into account any necessary adaptation of intermediaries’ businessmodels or the terms and conditions of business in line with the present re-striction, a transitional period is necessary. Weighing up the interests of theproviders and those of investor protection, the chosen deadline is also ap-propriate. Within three months after the announcement of the General Ad-ministrative Act, it is reasonable for the addressees to implement their obli-gation under the General Administrative Act.The deadline referred to above also does not run counter to the purpose ofthe measure. Rather, it is intended to give the addressees the option ofadapting their business models and terms and conditions in line with theintended restriction.2.8 Justification of the right of revocationI reserve the right of revocation, in particular to be able to prevent this prod-uct intervention measure from running counter to uniform European regula-tion of futures in the event that futures are regulated at European level. Inaddition, the right of revocation is designed to make it possible to respondto a change in the market situation.Notes:Under section 15 (2) of the WpHG, objections and appeals against measures under Article 42 of MiFIR do not have any suspensory effect.

Page 48 of 48Under section 120 (2) no. 2b of the WpHG, any person who willfully or neg-ligently contravenes an enforceable order under Article 42(1) of MiFIR com- mits an administrative offence.Instruction on available remedies:Objections to this General Administrative Act can be submitted to BaFin inBonn or Frankfurt am Main within one month of its announcement.Dr Thorsten Pötzsch