Contracts for difference – legal status in Poland

Leverage contracts in Poland

Leverage is a tool by which an investor increases the chance of gaining profits in the short term, using foreign capital. The potential profits are sizable especially when compared to the capital outlay required for such an operation. The investor obtains external financing by which he reduces his own costs. The financing entity may be a bank granting the loan. The interest on the loan will be treated as an expense, which is an opportunity to reduce the tax burden on the income from the operation. Here it should be noted that, like any market activity, the use of leverage involves some risk. Failure will involve repayment of financing and, in the case of a bank, also high interest rates. In short, leverage is investing with borrowed money. Profits versus losses can be calculated in a simple way. The amount that the investor lays out of his own funds is at the same time collateral for the entire investment. It can be 100 or 1000 PLN; the financing entity determines the level of leverage – in Poland it is a maximum of 100:1. Using such a conversion rate, an investor who actually has PLN 100 can invest PLN 10,000. If the investment goes well, the costs that the investor will incur will be the return of the borrowed amount plus interest. The change in the instrument that was purchased by the investor is done not in relation to his equity, but to the total amount based on leverage. A change of 1% in the wrong direction in the example above will result in the loss of the security amount and the discontinuation of the investment. Larger changes will result in additional losses for the investor. It is possible to protect against such a situation with a broker who finances investments. Negative balance protection guarantees that after a loss in the amount of the invested own amount, the position will close automatically and the investor will not be left with a debit.

Contracts for Difference

A contract for difference shows similarities to a leverage mechanism and, as such, can be considered a subtype of it. The contract is entered into between the provider of the contract  and the investor. The parties agree to exchange an amount equal to the difference between the opening and closing price of the position, resulting directly from changes in the price of the asset to which the contract relates. The investor in a CFD contract is not the actual owner of the underlying instrument, but only speculates on its value. A CFD is a flexible investment instrument. The investor himself decides when to close positions and realize a loss or profit. The transaction is executed in the currency of the underlying market, for example, in dollars in the case of US stocks, euros in the case of European stocks, and at the time of closing the position the profit or loss is converted into the base currency of the accounts. CFDs allow investors to take advantage of a rise in the price of the underlying (taking a long position) or a fall in those prices (taking a short position).

With CFDs on stocks, small investors who do not have the financial capacity to become shareholders of the chosen stock company have access to trading. The procedure for investing in these assets using a contract is very simple. All you need is to set up an investment account on the platform of one of the brokerage houses. In addition to this, stock contracts can be easily settled without separate accounting for dividends and capital gains. If you use a Polish broker, you need to fill out a ready-made PIT 8C. 

The foreign exchange market, referred to as Forex (from foreign exchange) originally referred to the actual foreign exchange market referred to as the interbank market. This market is mainly accessed by banks (hence the term interbank market), but also by multinational corporations, governments, central banks or institutional investors. The objects traded on this market are currencies, as well as derivatives based on currencies, most often, however, with delivery of the underlying instrument. The above means that on the Forex interbank foreign exchange market, actual buying/selling transactions of specific currencies take place. Forex is the largest market in the world and, as a market for currencies and derivatives, is the space where the most CFDs are concluded.

CFDs are concluded in many countries (including Australia, New Zealand, Russia, South Africa, Singapore, Switzerland, Turkey and most European Union countries with more developed financial markets, including Poland). In the United States, the Dodd-Frank Act of 2010 was followed by significant restrictions on such contracts. In Belgium, CFDs were banned from being offered. Brokers operating in France must introduce so-called guaranteed stop loss levels into their offerings. A trader, before entering into a transaction, must specify a stop loss level that cannot be increased but only reduced after the position is opened. In addition, a condition of protection against the creation of a negative balance (the so-called Negative Balance Protection) has been top-down enforced.

New platform on the Polish market:

The Polish market also provides portals offering multi-currency financial services. Over the years of activity, these platforms have built a leading position in the market for currency services in Poland. Recently more platforms have focused on CFDs, expanding their existing Forex services, replacing them with new investment services allowing trading on more than 5,000 OTC instruments. Some of the Polish investment platforms are centered around derivatives trading. It primarily includes contracts for difference (CFDs) on currencies, indices, commodities and raw materials, cryptocurrencies or stocks.


The ability to use financial leverage is the main feature of contracts for difference. The use of financial leverage has the effect of increasing the possible profit and possible losses of clients.

The risk of financial leverage is that customers may lose more than they have invested. This is a major risk that retail customers may not understand, regardless of written warnings. The deposit made by the customer is posted as collateral for his position. So, for example, if the price of the underlying instrument changes to the detriment of the client’s position causing the margin posted to be exceeded, the client may suffer losses in excess of the balance of funds in his CFD account, even after all other open CFD positions have been closed. The lower the required deposit, the higher the potential loss for the investor in case of unfavorable changes in the market.

To protect the interests of the investor, the provider can use a stop loss mechanism – if the selected price limit is reached, the positions will be automatically closed (as in the case of protection against losses with financial leverage). However, “stop loss” orders do not guarantee the level of protection, but only trigger a “market order” when the price of the contract for difference reaches the level set by the customer.

The risk arises from the fact that transactions may not be carried out immediately. There may be a delay between the time an order is placed and the time it is executed. During this time, the market situation may change to the investor’s disadvantage, which means that the order will not be executed at the expected price. 

Investing with CFDs also involves a number of costs, which, like the potential profit, are difficult for retail clients to estimate. CFD pricing, trading conditions and settlement rules are not standardized. Verification of the prices quoted by the provider is problematic, as the reference prices used to determine the value of the contract may differ from the price available on the market where the underlying is traded.

Equally problematic are the transaction fees, which are generally related to the full face value of the transaction, which translates into a significant expense at a higher financial leverage. In addition, fees are deducted from the initial deposit, making it necessary for the client to earn more on the contract to make a profit.

To illustrate the magnitude of the phenomenon, you can cite the results of clients, in the forex market from 2016 – 2020. [1]

The data show that the majority of active clients (77.7%) suffered a loss on forex transactions in 2020. The total absolute value of losses incurred by clients was more than 4 times the total absolute value of profits made.

Polish Financial Supervision Authority product intervention

In light of the circumstances described above, on August 1, 2019, the Polish Financial Supervisory Authority (Commission) issued a decision to apply product intervention to CFDs. This is of great importance from the perspective of the possibility of concluding such contracts, which were subject to significant restrictions.

According to the definition, posted on the Polish Financial Supervision Authority website, Product Intervention is a legal measure described in the EU Regulations: MiFIR[2] and PRIIP[3], by virtue of which the competent supervisory authority is authorized to impose a general prohibition or restriction of certain activities with respect to the financial instruments, structured deposits, insurance investment products indicated in the intervention, or the conduct of a certain activity or a given financial practice.

In Poland, the supervisory authority authorized to issue a product intervention is the Polish Financial Supervision Authority (Commission), whose competence in this regard is determined by the relevant national regulations – i.e. the Act on Supervision and Financial Market.

The Polish Financial Supervision Authority’s decision on the introduction of restrictions on the conclusion of contracts for difference (CFDs) was issued under Article 42(1)(a) of MiFIR, in conjunction with Article 23h(1) and (2) of the Act on Capital Market Supervision of July 29, 2005.

The said Act prohibits the marketing of CFDs, but establishes an exception. Such a contract may be entered into if a number of conditions are met together (simultaneously).

A CFD can be entered into when:

  1. The CFD provider requires the retail customer to pay an initial margin. The amount of the required deposit depends on the underlying instrument, or stock index. It amounts to:
    1. 3.33% of the value of the CFD when the underlying is a currency pair from the following list: the U.S. dollar, the euro, the Japanese yen, the pound sterling, the Canadian dollar, or the Swiss franc;
    2. if the underlying instrument is one of the stock indices listed in the decision, another currency pair, or gold;
    3. 10% if it is a commodity or stock index other than those listed above;
    4. 50%, in case the instrument is a cryptocurrency;
    5. 20%, in the case of a stock or underlying instrument not mentioned in this section.

For the purpose of determining the percentage of the initial deposit (if the customer has the status of an experienced customer), the supplier may use other minimum initial deposit values. These are sequentially for points a. and b. – 1%, for point c. – 10%, for point d. – 50%, for point e. – 20%.

  • The CFD provider shall provide protection to the retail customer by closing at least one of the open CFD positions, under the terms most favorable to the customer, when the total cash on the CFD trading account has fallen below half of the total initial margin protection for all open CFD positions;
  • The CFD provider shall provide the retail customer with negative balance protection by limiting the customer’s total liabilities for all CFD positions associated with a trading account with the contract provider to the amount of funds in that account;
  • The CFD provider shall not directly or indirectly pass on to the retail customer any payment, monetary benefit or excluded non-monetary benefit in connection with the marketing, distribution or sale of CFDs, other than the realized profits from the delivered CFDs;
  • Advertisements and promotional information disseminated or directed to retail customers or potential customers by the CFD provider shall contain a warning about the risks involved in entering into such contracts.

KIELTYKA GLADKOWSKI specializes in legal protection of international interests of CFD’s providers.

KIELTYKA GLADKOWSKI builds its specialization on a permanent basis, as exemplified by the following representative ad hoc actions for our clients carried out this year:

– adaptation of the CFD offer to the guidelines of the Polish Financial Supervision Authority;

– representation of a foreign operator of an internet trading platform before the Polish Financial Supervision Authority in the pending investigation;

– legal support, recommendations and action plan in respect of the entry to the Polish market with the Client’s new line of CFD products based on leverage and investment leverage in the financial market with high risk.