Why should we care about negative balance protection, and which regulatory agencies have strict rules on negative balance protection?

Forex is a large international market and is very sensitive to changes in global markets and international events. The volatility of this market is high and it is a huge risk for traders. Negative balance protection can help you avoid previously unpredictable high volatility without having to worry about losing your own money outside of your account, enabling traders to better control risk in the market.

This is especially important for new traders, who may not be familiar with how quickly the market changes during announcements, openings, or general market volatility.

On January 15, 2015, after the Swiss National Bank announced that it would abandon the minimum exchange rate limit of 1.2 euros/CHF, the foreign exchange market suffered a huge shock, and a large number of foreign exchange traders' accounts suddenly exploded, and even many brokers suffered huge losses and even went bankrupt.

Although nearly a decade has passed, the tragedy caused by this "black swan event" is still vividly visible.

What is negative balance protection?

Simply put, negative balance protection means that even if the market moves quickly and works against your position, your account will not go negative. The way negative balance protection works is very simple.

With this very useful measure, any loss that may exceed the total balance of your account will be automatically closed and reset to zero. As a result, you will never lose more money than you have deposited in your trading account.

Suppose you deposit $1,000 into your account and trade CFDS with a leverage of 5:1. In this case, you would have a position worth $5,000.

If there is market turmoil and your position suddenly drops 25%, you will suffer a loss of $1,250, or 125% of the money you deposited, due to leverage.

This means that your $1,000 balance won't cover your losses, and you'll owe the broker $250 if the broker doesn't offer negative balance protection.

However, if you execute the same trade with a broker that offers negative balance protection, you cannot lose more than the $1,000 amount deposited.

Negative balance protection is a very effective tool that can act as a stop loss on the investments you make and largely limit the potential losses a trader can suffer. By using a broker that offers negative balance protection, you can trade forex without owing the broker money.

Regulatory background

Negative balance protection has been a very hot issue for regulators for years. Following the Swiss Black Swan, after years of research and discussion, the European Securities and Markets Authority (ESMA) announced a new regulation for Forex, CFDS and binary options, which includes negative balance protection for each account.

The regulation will take effect in mid-2018. As a result, regulators in many countries in the European Union require negative balance protection provided by brokers to traders. In addition, regulators such as the FCA in the UK and ASIC in Australia have mostly required their Forex and CFD brokers to provide negative balance protection for traders.

According to BV network statistics, these regulatory agencies are: