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Best Brokers With Negative Balance Protection

Written By

James Barra

Written By

James Barra

James is an investment writer with a background in financial services. He has worked as a management consultant, where he delivered large-scale operational transformational programmes at some of Europe's biggest banks. James authors, edits and fact-checks content for a series of investing websites.

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Edited By

William Berg

Edited By

William Berg

William contributes to several investment websites, leveraging his experience as a consultant for IPOs in the Nordic market and background providing localization for forex trading software. William has worked as a writer and fact-checker for a long row of financial publications.

» William Berg Profile Page

Fact Checked By

Jemma Grist

Fact Checked By

Jemma Grist

Jemma is a writer, editor and fact-checker focused on retail trading and investing. Jemma brings a unique perspective to the forex, stock, and cryptocurrency markets and works across several investment websites as a researcher and broker analyst.

» Jemma Grist Profile Page

Updated

Jul 24, 2024

The best brokers with negative balance protection offer additional security to traders using leverage and demonstrate a dedication to client security.

Read this article to learn what negative balance protection is, how it works, different rules, and how to choose brokers with negative balance protection.

What Is Negative Balance Protection?

Negative balance protection is a security feature that applies when trading leveraged products. It prevents users from being able to lose more money than they have in their accounts, no matter how far their open positions drop, stopping them from becoming indebted to their broker.

While there are some firms without negative balance protection, most popular brokers, such as Interactive Brokers, eToro, markets.com, and XM offer the service. Generally, this applies to retail clients only and professional traders are not offered the same level of protection.

How Does Negative Balance Protection Work?

Negative balance protection ensures that, whenever you trade with leverage, you cannot lose more money than the balance of your account. It protects retail clients from becoming indebted to brokers.

The best way to explain how this works with one of the best brokers with negative balance protection is through an example. Let’s say that you have deposited $1,500 into a CFD trading account. The broker you are using offers maximum leverage of 1:30 and you decide to open a position with $1,000 at a leverage rate of 1:5.

This means that the position you actually open is worth $5,000. If the market is particularly volatile and your position suddenly drops by 40%, you will suffer a loss of $2,000, 133% of your account’s deposited funds (not the position margin). If you did not have negative balance protection, you would owe the broker $500.

However, if you got into this same scenario but your broker provided negative balance protection, your losses cannot exceed the deposited amount of $1,500. If the loss starts building, the broker will automatically close the trade when the loss hits $1,500, ensuring that you do not owe the broker money. Negative balance protection only protects funds up to the balance of your account.

If you had more than $2,000 deposited, you would lose the full amount.

It is also worth noting that this is not always a guarantee. Most brokers will close the position as it becomes too large but significant margin volatility could cause the position to drop even further before the order is fulfilled. When this happens, you may still owe the broker some money. However, the best brokers with negative balance protection will guarantee this and take on that added loss themselves.

Why Did Negative Balance Protection Become Mainstream

Negative balance protection became particularly prevalent in January 2015. Up to this point, the Swiss National Bank (SNB) had been holding the Swiss Franc (CHF) at a fixed exchange rate with the Euro (EUR), which it had been doing since September 2011. On January 14th, 2015, the SNB announced that it would stop this practice and, as a result, the Swiss Franc soared against the single market currency.

While this would be seen as a success for the Swiss National Bank, it had some unfortunate repercussions. The Swiss market recorded unforeseen losses as many traders had been shorting the Swiss Franc. Many of these investors ended up with negative balances as a result and it was feared that the brokers would demand these losses be paid to cover their losses.

Some brokers, including FXCM, chose to “forgive” up to 90% of their clients given the unprecedented nature of the losses. The main outcome was that negative balance protection entered the limelight and regulatory bodies started to create measures to prevent such drastic losses from happening again.

Pros

• Prevents large losses
• Allows traders to manage risk
• Saves traders from large debts
• Protects against high market volatility
• Prevents further events like the Swiss Franc

Regulations

Following the events in 2015, many regulators have implemented different rules when it comes to negative balance protection. It is important to check each individual broker but here is an overview of some of the main regulatory bodies policies.

The Financial Conduct Authority (FCA), the UK’s regulatory body, has implemented rules to ensure negative balance protection is offered. They have stated that firms offering CFDs and CFD-like assets must guarantee that a client cannot lose more than the total funds in their trading account.

Additionally, they must close out a customer’s position when their funds fall to 50% of the margin needed to maintain the open position on their CFD account. This applies to retail clients only, professional traders do not receive the same protection. The FCA’s supervisory team will work with brokers to ensure the proper management of negative balance protection.

The Cyprus Securities and Exchanges Commission (CySEC) is a regulatory body based in Cyprus and one of the main regulators for EU brokers. CySEC has taken a more lenient route for the implementation of negative balance protection. Under them, brokers must implement it on a per-account basis. This means that a client who has one large leveraged position within a portfolio can still lose more than the value of the initial position. The other positions or funds the client has will be used to cover the negative balance. Overall, a customer’s account can never have a negative balance and, if it does, that loss falls to the broker.

Australia’s regulatory body, the Australian Securities and Investments Commission (ASIC), also implemented similar rule changes in 2021. In addition to limiting the leverage offered on different assets to a maximum of 1:30, they have stated that brokers must provide negative balance protection. This ensures that clients losses are limited to the funds available in their account. As with the FCA and CySEC, these rules only apply to retail traders, professional traders still stand to lose more than their available funds.

Germany’s Federal Financial Supervisory Authority, better known as BaFin, also requires negative balance protection to be offered to clients. BaFin did not introduce a limit on leverage in 2017 but they have stated that all licensed brokers must offer negative balance protection to customers, ensuring retail clients cannot lose more than they have deposited into their accounts. Any losses on top of this are borne by the broker.

How To Choose Brokers With Negative Balance Protection

When choosing from the best brokers with negative balance protection, there are many things to look out for. Below we have outlined our top recommendations.

One of the first things to check is which agency the broker is regulated by. Try to ensure that you use a broker who is regulated by a top-tier regulatory body, such as the FCA, CySEC or ASIC. On top of requiring that brokers offer negative balance protection, they implement fund segregation rules, offer dispute meditation and provide insurance cover.

Check each broker’s website and find the section on security. Here, it should clearly mention whether they offer negative balance protection, alongside other things like cybersecurity, login protection and two-factor authentication (2FA).

Customer reviews are a great way to learn about a broker’s practices. Many people will note down their experiences with brokers, positive or negative, on online forums and websites. Visit these to learn about brokers and how they deal with issues like negative balance, fund withdrawal issues and more.

Look at the funding procedures a broker provides. Check that they provide a variety of payment methods and that withdrawals and deposits are processed within two to three days. This allows you to trust that your funds will go through successfully and you do not have to worry about your money being lost. Lots of payment methods is also an indication of privacy and security levels, as each provider will have required standards.

Additionally, there are a host of other things to check when comparing the best brokers with negative balance protection. You should ensure that the chosen broker offers the assets you want to trade, be that forex or stock CFDs, for example. Moreover, compare fees and spreads, trading platforms, mobile apps and additional features.  For a full guide to selecting a broker, see our guide here.

Final Word

Opening accounts with the best brokers with negative balance protection helps protect your funds from serious market downturns and volatility. It ensures that, when trading a leveraged position, you cannot lose more than the amount you have deposited in your account,  preventing retail clients from becoming indebted to brokers.

When choosing a broker, try to ensure that they offer negative balance protection as markets are volatile and you do not want unexpected losses. Additionally, follow our guide above to ensure you pick brokers that you can trade safely with.

FAQs

Does CySEC Require Negative Balance Protection?

Yes, CySEC does require negative balance protection. They are more lenient than some other bodies but they still state clients accounts cannot go into the red.

Do The Best Brokers With Negative Balance Protection Prevent Big Losses?

Brokers with negative balance protection don’t just automatically stop any major losses from hitting your account, they only protect you from a net zero balance. This means that major losses that don’t completely wipe out your capital are still let through, so you should still implement robust risk management.

Does The FCA Require Negative Balance Protection?

Yes, the FCA requires all licensed brokers to offer negative balance protection. This is relevant for all retail clients, though professional traders are not afforded the same protection as they are expected to better understand the risks involved with margin trading.

Do The Best Brokers With Negative Balance Protection Remove Risk?

Negative balance protection removes the risk of being indebted to the broker, though general financial risk is still very much present and you can still lose your entire account balance.