Concept and Definition of Difference Transactions
The difference transaction is a term from German civil and capital markets law and refers to a contractual structure in which, instead of delivery of a traded item, the settlement amount between the agreed and actual value at the time of contract fulfillment is paid. The exchange of goods or currency does not generally take place in this type of transaction; rather, the transaction is limited to the payment or receipt of an amount of money resulting from the difference between two agreed prices. Difference transactions are particularly relevant for financial instruments such as securities, currencies, commodities, or precious metals.
Legal Basis for Difference Transactions
Civil Law Classification
The German Civil Code (BGB) does not contain an explicit regulation for difference transactions. The civil law treatment is based on the general law of obligations. Difference transactions are classified as reciprocal contracts under §§ 145 et seq. BGB, where the obligation to perform is limited to payment of the difference amount.
Difference transactions are of special significance in the context of forward transactions (§ 762 BGB). According to § 762 para. 1 sentence 1 BGB, games and bets are not legally enforceable (natural obligation). Sentence 2 of para. 1 stipulates that the same applies to difference transactions in which both parties do not intend to deliver or accept the object of performance, but merely to demand or pay the difference amount.
Distinction from Forward Transactions
A classic forward transaction entails the acquisition or delivery of a specific traded item at an agreed time. In contrast, difference transactions do not involve an intention of actual performance; i.e., from the outset the parties intend only a cash settlement. In legal parlance, such difference transactions are referred to as “leverage transactions,” “speculative transactions,” or “CFDs” (Contracts for Difference), though these terms are not completely synonymous.
Financial Market Law Regulations
Securities Trading Act (WpHG)
The Securities Trading Act (WpHG) and the associated Regulation (EU) No. 600/2014 (MiFIR) govern difference transactions with regard to insider trading, market abuse, and the permissibility and offering of certain derivative products. Difference transactions are regarded as financial instruments pursuant to § 2 para. 2 no. 3 WpHG (derivative financial instruments). As such, they are subject to market and supervisory regulations as well as specific transparency and information obligations.
Prohibition and Restriction of Certain Difference Transactions
The Federal Financial Supervisory Authority (BaFin) may, according to § 4b Securities Trading Act and §§ 15, 20 Product Intervention Regulation, prohibit or restrict certain difference transactions, such as CFDs with margin requirements, to ensure investor protection against excessive risks. However, a complete ban on difference transactions does not exist. Instead, specific requirements apply to product design, marketing, and distribution to retail clients.
Commercial and Tax Law Aspects
In commercial law, difference transactions are classified as transactions relating to financial instruments (§ 1 HGB in conjunction with § 340 HGB). The tax treatment is based on the principles for income from capital assets (§ 20 EStG) or from a commercial activity (§ 15 EStG), provided the transactions are conducted systematically and on a significant scale.
Distinction from Similar Legal Institutions
CFD Transaction
The “Contract for Difference” (CFD) is a typical difference transaction from the Anglo-American legal system. In German law, CFDs fall under the definition of difference transactions, provided there is no genuine intention to deliver or accept the underlying asset.
Spot Transaction
In contrast to a difference transaction, a spot transaction involves immediate or short-term physical delivery and payment of the underlying asset. Therefore, it is not a difference transaction in the legal sense.
Option Transaction
An option transaction grants one party the right, but not the obligation, to buy or sell an underlying asset. Opportunities for cash settlement may resemble those of a difference transaction, but legally, these are independent types of contracts.
Legal Validity and Enforceability
Non-enforceability under § 762 BGB
Difference transactions that meet the requirements of § 762 para. 1 sentence 2 BGB (no intention to deliver or accept, but pure cash settlement) are legally unenforceable. This means that no legally enforceable claims arise from such transactions; however, voluntary payments remain valid (§ 762 para. 2 BGB).
Exceptions and Limitations
Difference transactions concluded as exchange-traded forward transactions within the meaning of § 2 para. 3 Securities Trading Act are exempt from non-enforceability. Such transactions are considered legally valid and enforceable as long as they are executed through an organized exchange or a multilateral trading facility.
Consumer Protection Law Aspects
Providers of difference transactions are subject to extensive information and disclosure obligations towards consumers. This particularly concerns warnings, risk, and product information to prevent unwanted speculation errors and loss risks.
Practical Relevance and Significance
Difference transactions have gained significant practical importance, especially in the use of leveraged products. They enable participation in price movements and price differences even with a small capital investment. Due to their complexity and high risks, difference transactions are primarily intended for professional market participants. Distribution to retail investors in Germany is subject to strict regulatory requirements.
Case Law and Literature
Case law regularly refers to the non-enforceability pursuant to § 762 BGB (see BGH, judgment of 12.01.1987 – II ZR 186/85). Scholarly literature and commentaries on difference transactions emphasize especially the distinction of speculative transactions from permitted forward transaction practices and the applicability of regulatory provisions.
Summary
The difference transaction is a contract model relevant under civil and capital markets law, in which only price differences are settled without delivery of underlying assets. Legally, difference transactions are subject to restrictions on enforceability (§ 762 BGB), unless they count as exchange-traded forward transactions. Their comprehensive regulation in financial market law aims especially at investor protection given the high risks involved. Difference transactions are significant for professional market participants, especially in the field of derivatives and financial innovations. The product structure, admissibility, and legal consequences of difference transactions are subject to ongoing development by legislation, financial supervision, and case law.
Frequently Asked Questions
What statutory regulations apply to difference transactions in Germany?
Difference transactions in Germany are subject to a wide range of statutory provisions. In principle, the conclusion and execution of difference transactions under § 37d Securities Trading Act (WpHG) are tied to special requirements. The legal framework is further provided by the Banking Act (KWG), which, among other things, regulates who is permitted to offer and conduct difference transactions. According to § 1 para. 1a KWG, difference transactions constitute financial services for which authorisation from the Federal Financial Supervisory Authority (BaFin) is required. In addition, there are provisions of the Market Abuse Regulation (MAR) and the EU Directive MiFID II, which provide for transparency, information, and conduct of business obligations. It should also be noted that BaFin has implemented a so-called product intervention mechanism within its supervisory powers since August 2017, through which, for example, the distribution of difference contracts (CFDs) with margin requirements to retail clients in Germany has been prohibited. Further restrictions may arise from the German Civil Code (BGB), especially in connection with the so-called prohibition of difference transactions under § 762 BGB.
When are difference transactions legally considered forward transactions within the meaning of the BGB?
Difference transactions are legally considered forward transactions when they do not merely have a speculative character, but are aimed at exchanging difference amounts between the agreed base price and the actual price achieved, without actual delivery of the underlying asset. This corresponds to the statutory definition of forward transactions under § 2 para. 2 WpHG in conjunction with § 762 BGB. Thus, forward transactions exist whenever a future monetary or asset value is to be achieved and at least one contractual party assumes a significant risk in terms of market developments. Particularly for difference transactions concluded between non-professional market participants, the courts regularly examine whether these are invalid as prohibited difference transactions under § 762 para. 1 BGB, unless they fall under the exceptions.
Under what conditions are difference transactions void under § 762 BGB?
According to § 762 para. 1 sentence 1 BGB, bets and so-called difference transactions are generally void unless they are concluded with a commercial organizer. This means that difference transactions are always legally invalid if entered into privately between two parties without licensed brokerage or clearing. The nullity does not apply if at least one contractual party operates a business requiring authorisation – such as a bank, financial service provider, or exchange trader. The prerequisite for this is the existence of the relevant authorisation under the KWG and/or supervision by BaFin. For institutional financial actors and within the organized market (e.g., exchanges), difference transactions are subject to this exception and thus legally valid.
What obligations do providers and intermediaries of difference transactions have towards retail clients?
Providers and intermediaries of difference transactions are subject to numerous investor protection obligations, especially when retail clients are addressed. Under the WpHG and MiFID II, extensive information obligations must be observed. This includes comprehensive information for customers about the functioning of the product, the risks—such as the risk of total loss and possible margin requirements—as well as the fee structures. There is a duty to document and assess suitability, meaning the appropriateness and suitability of the product for the respective customer must be checked. Providers must also disclose risk warnings and loss statistics. Furthermore, the ban on margin requirements for CFDs for retail clients must be strictly implemented. The German rules have been specified by BaFin through general administrative orders, which may prohibit or severely restrict the marketing and distribution of certain difference transactions to retail clients.
What specific legal risks exist for private individuals in difference transactions?
When entering into difference transactions, private individuals face legal risks in particular regarding the validity of the contract and protection against margin requirements. In particular, there is the risk that a difference transaction is deemed void under § 762 BGB in the absence of a commercial counterparty, so that no mutual claims arise from the transaction. This generally also includes the right to reclaim payments already made, unless exceptions apply. Another risk concerns the legal consequences of the counterparty’s insolvency, for example with foreign providers whose insolvency law does not match German standards. Finally, there is the risk that due to insufficient or incorrect advice, claims for damages may arise, with the burden of proof often lying with the retail client.
What is the significance of a BaFin license for the legality of difference transactions?
A BaFin license is a key requirement for the legal admissibility of offering and brokering difference transactions. Only companies holding a license under the Banking Act or as a securities institution are permitted to offer, broker, or execute these transactions. Without such a license, offering, brokering, and also execution of difference transactions in Germany is both inadmissible from a regulatory and civil law perspective and may lead to contracts being void. Furthermore, violations can result in severe penalties, including prohibition orders, fines, or criminal consequences. For customers, a BaFin license is a central indicator of the provider’s reliability and legality.
How is cross-border trading in difference transactions regulated from a German perspective?
Cross-border trading in difference transactions is subject to the EU passporting principle within the European Economic Area (EEA). This means that providers licensed in an EU or EEA member state may, after notification to BaFin, offer their services legally in Germany as long as this is covered by the respective license. Nevertheless, German supervisory law applies in some areas, especially regarding consumer protection issues, so providers must also comply with German product intervention measures and conduct of business rules. Offerings from providers outside the EU are generally not permitted if they are specifically directed at German customers, and may therefore result in both regulatory and civil law consequences for providers and customers.
