BaFIN: The pot that calls the kettle black – Op Ed

Germany’s regulatory authority picked unfounded holes in Cyprus brokers in a public report, just a week after ESMA declared BaFIN ‘useless’ as it allowed a bankrupt entity to rip off customers for years. Here is our analysis of the hypocrisy

Those in glass houses should not throw stones, wisely states the old adage.

Yesterday’s bout of regulatory hypocrisy comes courtesy of Germany’s bureaucratic financial markets competent authority BaFIN, which made the brazen statement that almost half of the FX brokerages based in Cyprus which operate under the CySec regulatory structure are responsible for what it deems to be ‘infringements.’

Of course, all seasoned professionals in the FX and electronic trading industry worldwide are of the full and valid opinion that Cyprus, with its plethora of retail FX brands, some of which are brokerages and some of which are white labels of other brands or brokerages, is a mixed bag.

There are excellent, high quality and large companies which originated from the small Mediterranean island, and there are nefarious ne’erdowells whose owners rarely show their face at Larnaca airport and whose client bases are made up of unsuspecting novices who are being onboarded elsewhere and whose funds are being held in a dubious bank account in a former Soviet state with no transparency or recourse should the client be slipped a fast one.

There have been many criticisms and many reasons to admire the enterprises in Cyprus, however one regulator that should perhaps look to its own standards before criticizing adherents of others so quickly is BaFIN.

Yesterday, BaFIN’s scathing diatribe indicated that Cyprus based FX and CFD brokers are responsible for violations of the product intervention measures in 49% of all CFD providers.

BaFIN’s report, published on its website in German, insinuated that almost half of the 40 CFD providers which it considers to be in breach of the prescribed risk warnings and product intervention procedures were based in Cyprus, 12% from the UK and 29% in Germany.

BaFIN particularly noted that the majority of violations were relating to risk warnings, the remainder to leverage restrictions and brokerages attempting to pressure sell to customers by using bonuses, which is not legal under European rulings overseen by the European Securities and Markets Authority (ESMA).

Whilst that is very true, most of the firms offering bonuses and high leverage are onboarding clients via offshore entities with common ownership between the Cyprus and offshore divisions of the same firms. Opinions on that vary, however unfortunately it is legal as CySec has no jurisdiction over offshore entities even if owned by the same company and using the same brand name and identity, thus BaFIN’s assertions are borderline defamatory.

BaFIN’s timing in making these claims is either coincidental, or is an intentional smokescreen to deflect attention from the scathing attack directed at its own regulatory incompetence last week by ESMA, which described the German regulator as ‘useless’.

Pointing the finger at Cyprus brokers on a point that is potentially not illegal when BaFIN allowed a bankrupt payment processor called Wirecard to bilk its customers for several years is anathema.

The findings by the ESMA last week, upon which FinanceFeeds reported in detail, identified a number of “deficiencies, inefficiencies and legal and procedural impediments” in the two-tier German supervisory system, which splits responsibilities for enforcement between BaFin and the Financial Reporting Enforcement Panel (FREP).

Problem areas highlighted include the independence of BaFin from issuers and government, including “a heightened risk of influence by the Ministry of Finance” given the frequency and detail of reporting by BaFin before actions were taken.

Wirecard was a rising blue chip star before its collapse following the discovery of a gaping €1.9 billion hole in its balance sheet and regulatory bodies appeared at times to be more interested in defending the firm against a rising tide of allegations rather than dig deeper into its financial accounts. Esma says Frep’s examination procedures of Wirecard financial reports did not appropriately address areas material to the business of Wirecard, nor the media and whistle-blowing allegations against the firm.

Equally, a lack of information about Wirecard’s employees’ shareholdings was found to raise doubts on the robustness of BaFin’s internal control system regarding conflicts of interest of its employees vis-à-vis issuers

Steven Maijoor, Esma chair, says: “The Wirecard case has once again highlighted that high-quality financial reporting is essential for maintaining investor trust in capital markets, and the need to have consistent and effective enforcement of that reporting across the European Union.”

“Today’s report identifies deficiencies in the supervision and enforcement of Wirecard’s financial reporting. The report’s recommendations can contribute to the review of the German regime for supervision and enforcement” he said at the time.

The outcome is likely to lead to an overhaul of the German supervisory regime to address the limitations in the two teir reporting system and the respective roles of BaFin and Frep.

Pointing the finger at more successful and important FX and CFD trading centers by BaFIN which presides over a region with no standing on the worldwide electronic trading stage is not a new thing.

It was always relatively obvious to those in major capital markets regions that Germany’s arrogant regulatory authority which requires all OTC firms to lodge client funds with German banks only, and had the audacity a few years ago to infer that a ‘latency floor’ would be enforced on FX brokers making their execution slower in order to level the playing field – ie thwart more efficient OTC firms to allow the large, old fashioned Frankfurt-based venues to keep their stronghold, is odious to say the least and perhaps akin to Volkswagen Group which could not make its diesel engines modern and sophisticated enough to comply with emissions rules in the United States, cheating instead. The furore was immense, that is if you could hear it over the clattering and see it through the smoke generated by those engines.

BaFIN is regarded by many as one of the most recalcitrant and difficult organizations to operate under, and whose rules and imposed obstacles favor neither capital markets entities or their clients.

During the run up to the exit from the European Union of Great Britain, and during the absurd attempts by Frankfurt to merge Deutsche Boerse with London Stock Exchange – something FinanceFeeds stated from the outset would never happen – in order to try to encourage derivatives trading into Germany from London, a feat that would never be possible without political coercion because Germany cannot hold a candle to the UK when it comes to any form of expertise, infrastructure or market presence, attempts were made to take clearing to Europe, which of course failed, and here we are today with very few brokers operating under the BaFIN regime.

Last weeks lambasting by ESMA stopped just short of being expletive. Perhaps BaFIN’s unfounded finger-pointing should be viewed with a grain of salt.


Read this next

Institutional FX

Euronext reports double-digit growth in FX volume

Pan-European exchange, Euronext has reported a 10 percent rebound in the average daily volume on its spot foreign exchange market. The ADV figure stood at $19.6 billion in January 2022, which is up from December’s $18 billion.

Digital Assets

Voyager subpoenas FTX’s inner circle over Alameda loan

Bankrupt crypto broker Voyager Digital, represented by law firm Kirkland & Ellis, is seeking court approval to subpoena Sam Bankman-Fried’s inner circle, as well as Alameda Research’s former executives.

Retail FX

AvaTrade seals sponsorship deal with F1’s Aston Martin team

Dublin-based forex broker AvaTrade today announced that it has concluded a sponsorship deal with Formula One’s Aston Martin Cognizant team that entails sponsorship rights and other marketing benefits.

Executive Moves

M4Markets onboards Invaxa CEO Marios Antoniou as COO

Seychelles-regulated brokerage firm M4Markets has appointed Marios Antoniou, who has a colorful career within the foreign exchange industry, in the capacity of its Chief Operations Officer.

Digital Assets

GK8 now allows clients to control their digital assets as they would their fiat

“As the institutional market is increasingly turning to self custody, our policy engine empowers them to automate transactions, approvals, and even crucial workflows, while providing the highest degree of security, consistency, governance and control.”

Digital Assets

Retail CBDCs in the UK: “Welcomed” by CryptoUK and R3, but “Dystopian” for ETC Group

“At this stage, we judge it likely that the digital pound will be needed in the future. It is too early to decide whether to introduce the digital pound, but we are convinced preparatory work is justified”, said the BoE and HM Treasury.

Institutional FX

Centroid taps Iress API to provide retail brokers with real-time market data

“It has always been a challenge to have an efficient, elegant solution for market data and order execution for retail brokers, but with Iress we have found absolutely the right partner to add to our client offering.”

Digital Assets

Ramp launches FCA-approved off-ramp product, onboards Brave, Trust Wallet, Ledger

“To obtain and maintain our FCA registration, we must meet and operate within their strict anti-money laundering and counter-terrorist financing standards. This is a huge achievement for us, as compliance is a cornerstone of our business and what we stand for.”

Institutional FX

State Street launches FIX API for Fund Connect ETF platform

“Expanding from proprietary APIs to the FIX industry standard will bring us closer to our goal of 100% digital interactions. This is another example of innovations we’ve brought to our operating model as we celebrate 30 years of servicing ETFs since the launch of SPY.”