Cash Loss ratio monitoring
Cash Burn Ratio ("CBR")
By means of the general ruling pursuant to Art. 42 of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (MiFIR) of 23 July 2019, the European supervisory authorities have restricted the marketing, distribution and sale of financial contracts for difference ("CFD") in various areas.
In addition to various technical and organisational changes, investment firms were obliged to label all direct and indirect communications that serve the marketing, distribution or sale of CFDs with a corresponding risk warning. This regulation covers smartphone applications ("apps") as well as the description of the app in the app store, promotional videos of any kind, including via video portals such as YouTube, podcasts (audio) as well as the description of the podcasts, social media messages such as Twitter, Facebook, Instagram and comparable channels that are offered to consumers for use.
The risk warnings follow standardised specifications of the supervisory authorities and are intended to enable an indication that allows conclusions to be drawn about risks to which inexperienced users in particular are exposed when considering the products and services of the respective providers for the first time. The warnings - which follow a similar system as the health risks depicted on tobacco products, for example - are intended to help raise awareness that the risk-reward ratio can have a disproportionately negative effect. Put in simple terms: There is a high probability that one will lose invested capital as an inexperienced investor.
From a technical point of view, there are clear guidelines on how the values must be calculated by the companies. The loss percentage to be determined reflects the share of CFD trading accounts of small investors with the respective CFD provider who have realised losses when trading CFDs.
The calculation shall be performed on a quarterly basis and shall cover a period of 12 months up to and including the day before the day on which the calculation is performed ("12-month calculation period").
The calculation of the loss percentage shall be carried out in accordance with the following specifications which can be read in detail here:
- An individual CFD trading account of a retail investor has lost money when the sum of all realised and unrealised net profits from CFD trading in the 12-month calculation period is negative.
- In addition, all costs, including all fees, charges and commissions, in relation to a CFD trading account shall be included in the calculation.
The following items shall be excluded from the calculation:
- any CFD trading account that has not had a link to an open CFD within the calculation period;
- all profits and losses from products other than CFDs in connection with the CFD trading account, all deposits or withdrawals of funds to or from the CFD trading account.
DDH Loss Ratio Monitoring
If you find information with the abbreviation 'CBR' on our portal, this abbreviation stands for the Anglo-Saxon equivalent of loss ratio. CBR stands for cash burn rate or cash burn rate ratio (see also https://de.wikipedia.org/wiki/Cash-Burn-Rate).
As you can see from the data collected, the CBR ranges from (as of Q1/2023) 21% to 92%, and in some cases, even higher.
To ensure comparability, the higher value was always used for non-specific - quantitative - information such as a range ("74% to 89%"). If non-specific - qualitative - information ("the vast majority") was given, the value 90% was assigned.
If no information on the loss ratio was found during screening or if it was not provided in accordance with the regulations, the value 99.99% was recorded.
CBR histories and trends
DDH has been systematically recording loss ratio metrics and their histories since the introduction of this requirement in 2018. In addition, DDH allows the current quarter to be compared to the previous quarter and presents the trend and ranking in a separate view.
Interpretation of the loss ratios
With regard to the interpretation of the loss ratio, there is no uniform formula from which a generally valid statement could be derived. Different parameters determine how high the percentage of transactions closed in loss is in its entirety. Important: Since CFDs are also used for hedging transactions, losses can be part or also the result of a corresponding hedging strategy. Also, no natural conclusion should be drawn that a loss rate of, for example, 80% on the part of the investor automatically results in 80% profit for the provider of the products. Particularly in the latter case, it is essential to understand, among other things, the regulatory options under which CFD providers can operate. In addition to the widespread market maker models, in which brokers keep so-called A and B books, there are many financial service providers whose scope of licensing does not provide for this possibility. We have compiled an overview here that breaks down the market makers according to the scope of their licences.
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1 Guidelines on the implementation of the general ruling ursuant to Article 42 of Regulation (EU) No 600/2014 (MiFIR) of 23 July 2019 regarding Contracts for Difference reference number VBS 7-Wp 2000-2020/0026 (BaFin).
"The most frequent case: providers from Cyprus do not use the prescribed risk warning or do not use it correctly...." is one of the conclusions of an audit report published by BaFin in November 2020, which looked at the implementation of the measures.
The supervisory authority found that every second provider examined had disregarded the requirements. The data collected monthly by DDH and published quarterly by DDH in rotation with the intervals stipulated by ESMA show that the findings published at the end of 2020 still exist in part at the end of 2022.
You can access the BaFin article here.