The best brokers with negative balance protection provide extra security for traders who use leverage. They also demonstrate a dedication to the trader's overall security and user experience.
Whether you're on the lookout for a forex broker, a CFD broker or just an international brokerage firm offering a wide range of products, negative balance protection should be an important consideration.
This page introduces negative balance protection, how it works, various regulatory rules, and how to choose brokers with negative balance protection.
Negative account balance protection is a safety feature that applies to trading leveraged products. It prevents traders from losing more money than they have in their account, no matter how low their open positions are, thus preventing them from being debted to their broker.
Although some brokerage firms don't offer such protection against negative balances, Europe's best brokers offer this service to their trader clientele. Professional, however, aren't elligible for the same level of protection.
The best way to explain how a broker offers negative account balance protection is through an example. Let's say you deposited £15,000 into a CFD trading account. The broker you use offers a maximum leverage of 1:30 and you decide to open a position of £10,000 with leverage of 5:1. This means that the position you actually open is worth £50,000. If the market is particularly volatile and your position suddenly drops by 40%, you will incur a loss of £20,000, or 133% of the funds deposited in your account (not the position margin). If you didn't have negative balance protection, you would owe the broker £5000.
However, if you find yourself in the same scenario but your broker has provided you with negative balance protection, your losses cannot exceed the deposited amount of €15,000. If the loss starts to accumulate, the broker will automatically close the trade when the loss reaches €15,000, which will save you from owing the broker money. Negative balance protection only protects funds up to your account balance. If you had deposited more than €20,000, you would lose the entire amount.
It should also be noted that this is not always a guarantee. Most brokers close the position when it becomes too large (stop out - margin call), but significant margin volatility can cause the position to drop even further before the order is executed. When this happens, you may still owe the broker a bit of money. However, the best brokers with negative balance protection will guarantee this and bear any additional loss themselves.
Protection against negative balances became particularly prominent in early 2015. Until then, the SNB (Swiss National Bank) kept the Swiss franc (CHF) at a fixed exchange rate with the euro (EUR), which it had been doing since late 2011. On 16 January 2015, the SNB announced that it was ending this practice and, as a result, the Swiss franc soared against the euro.
Although this decision could be considered a success for the SNB, it had unfortunate repercussions. The Swiss market recorded unexpected losses as many traders shorted the Swiss franc. Many of these investors ended up with negative balances as a result and it was feared that brokers would require these losses to be paid to cover their losses. Some brokers, including FXCM, have chosen to "forgive" up to 90% of their clients given the unprecedented nature of the losses. The main result was that negative balance protection came into the limelight and regulators began to create measures to prevent such drastic losses from happening again in the future.
Following the 2015 CHF debacle, many regulators have implemented rules to combat negative balances. It is important to check each individual broker, but here's an overview of some of the main policies we've seen.
The UK's FCA (Financial Conduct Authority), has implemented rules to ensure that negative balance protection is offered. It says companies offering CFDs and CFD-like assets must ensure that a trader can't lose more than the total funds in his or her trading account. They must liquidate a trader's position when their funds drop to 50% of the margin needed to keep the position open in their CFD account. This only applies to retail clients, professional traders don't have the same protection.
The CySEC (Cyprus Securities and Exchanges Commission) regulatory body (and one of the main regulators of brokers in the EU) has taken a more lenient approach to implementing negative balance protection. It says that brokers must implement it on a per-account basis. This means that a client who has a large leveraged position in a portfolio can still lose more than the value of the original position. Other positions or funds available to the client will be used to cover the negative balance. Overall, a trader's account can never show a negative balance and, if it does, that loss is the broker's loss, not the trader's.
The ASIC (Australian Securities and Investments Commission), Australia's regulatory agency, also implemented similar rules in 2021. In addition to limiting leverage on different assets to a maximum of 30:1, the ASIC said brokers must provide negative balance protection. This ensures that client losses are limited to the funds available in their account. As with the FCA and CySEC, these rules only apply to retail traders, with professional traders always at risk of losing more than their available funds.
Germany's BaFin agency also now requires that negative balance protection be offered to traders. BaFin did not introduce a leverage limit in 2017, but it said all licensed brokers must offer negative balance protection to traders, which ensures that its clients cannot lose more than they deposited into their accounts. Any additional loss is to be borne by the broker.
When seeking a broker offering negative account balance protection, there are a few things to consider.
One of the first things to check is the agency the broker is regulated by. Try to ensure that you're using a broker that's regulated by a top-tier regulatory body, such as the FCA, CySEC, or ASIC. In addition to requiring brokers to provide negative balance protection, they implement fund segregation rules, offer dispute mediation, and provide insurance coverage.
Check each broker's website and find the security section. It should clearly state whether it offers negative balance protection, along with other things like cybersecurity, login protection, and two-factor authentication.
Traders' reviews are a great way to learn about a broker's practices. Many people write about their experiences with brokers on online forums and websites. Check them out to learn more about the brokers and how they deal with negative balance issues, fund withdrawals, etc.
Examine the funding options provided by a broker. Check that it offers a variety of methods and that withdrawals and deposits are processed within 48 or 72 hours. This allows you to be sure that your funds will be processed successfully and you won't have to worry about losing your money. The multiplicity of payment methods is also an indication of privacy and security levels, as each provider will have their own standards.
There are a gang of other things to check when comparing the best brokers with negative balance protection. You need to make sure that the broker offers the assets you want to trade, be it forex or stock CFDs, for example. Compare fees and spreads, trading platforms, mobile apps and additional features.
Opening an account with a top broker that has negative account balance protection helps you protect your funds from severe downturns and market volatility. It ensures that when you invest with leverage, you won't lose more than you deposited in your account, which prevents you from going into debt with a broker. When you choose a broker, make sure they offer negative balance protection, as the markets are volatile and you don't want to be subject to unexpected and huge losses.
|Brokers||Negative account balance protection||Regulation||Official website|
|FCA, ASIC, CySEC|
|ASIC, CBFSAI, FRSA, B.V.I FSC, FSCA, FSA.JP|
|CySEC, ASIC, FSA, BVI|
|CySEC, FCA, DFSA, FSCA, FSA|
|FCA, ASIC, DFSA|
|CySEC, ASIC, IFSC|
|CNMV, FCA, KNF, CySEC, BIFSC, DFSA, FSCA|
ASIC: Australia, BIFSC: Belize, BVI: British Virgin Islands, CNMV: Spain, CySEC: Cyprus, DFSA: Dubaï, FCA: United Kingdom, FSA: Seychelles, FSA.JP: Japan, FSCA: South Africa, IFSC: Belize, KNF: Poland
CFD trading comes with a high risk of losing money, it is therefore not suitable for all investors. Between 74-89% of retail investor accounts lose money when trading CFDs.
Yes, the CySEC requires negative balance protection. They are more lenient than other regulatory agencies, but they make it clear that traders' accounts cannot become negative.
Brokers with automated negative account balance protection don't prevent huge losses from hitting you, they simply protect you from having a negative balance. This means that huge losses that don't completely wipe out your capital are still possible, so you should continue to use a solid risk management method.
There are many factors to consider and each trader will have different requirements. In general, you should compare the best brokers with negative account balance protection by checking that they are regulated by a top notch regulatory agency, that they offer the assets you want to trade on the platform you want, and that they offer convenient payment methods and base currencies.
Yes, the FCA requires that all licensed brokers offer negative account balance protection. This applies to all retail traders. Professional traders don't benefit from the same protection as they're expected to better understand the risks of margin trading.
Negative account balance protection removes the risk of owing money to your broker, but the general financial risk is still very much present and you could still lose your entire account balance.