CySEC clarifies rules for protection against negative balance
CySEC clarifies rules of protection against the negative balance for the operations FX and CFD trading with leverage effect
The financial regulator CySEC has issued a clarification notice on protection against the negative balance for the customers of forex brokers that use leverage.
At the end of November, the CySEC had announced a change to the rules for the brokers FX and CFD trading, prohibiting bonuses and imposing a ceiling of 50 for the leverage effect, another provision somewhat neglected was the protection against the negative balance.
If a position to leverage rapidly deteriorates, for example because of a spike in price, a client that uses a lever can theoretically have negative equity. The protection against the negative balance eliminates this problem because the clients cannot lose more than what they have on deposit with a broker.
The protection against the negative balance can be established on each transaction or on the overall account. CySEC took the road more forgiving (regarding brokers), stating that the protection will be set up on each account. In other words, a customer with a large position with a leverage effect can still lose more than the value of the initial position. All other trades or funds that the client has with the broker can be used to cover this negative balance. But, on the whole, the account of a customer may not enter into a negative territory. If this is the case, the loss is the responsibility of the broker, not the client.