Financial regulations are forms of regulations which subject financial institutions to certain requirements, restrictions and guidelines. Financial regulations are not something new in Europe’s history of finance as the Dutch were the first to implement a ban in short-selling in 1610.

The aims of financial regulations are to maintain confidence in the financial system, ensure its stability and contribute to its protection, while securing that consumers are protected from any deceptive or fraudulent practice. The European Union (EU) reformed its financial governance framework, after the sovereign debt crisis that hit it at the end of 2009. European financial regulators are trying, through the implementation of new rules, to protect consumers in their dealings with financial firms.

The European Securities and Markets Authority (ESMA) has already sought evidence from stakeholders on the impact of a series of proposed measures. One of the measures under consideration, regarding the trade of Contract For Differences (CFDs), is negative balance protection on a per account basis.

What is Negative Balance Protection

Negative balance protection is a precautionary measure that brokerage firms take in order to safeguard their clients. Negative balance protection policy ensures that traders will not lose more money than deposited, if their account goes into negative as a result of their trading activity. This means that if a trader chooses a brokerage firm that offers negative balance protection, he won’t owe money to the firm because of a bad trading decision.

Most times brokers have safeguards available such as margin calls, but, in the past, these safeguards didn’t work well when quick and unexpected market movements took place. The speed of the movement may move the price beyond your margin call close out level resulting to larger than expected capital loss.

On 14th January 2015, the Swiss National Bank (SNB) suddenly announced that it would stop holding the Swiss Franc (CHF) at a fixed exchange rate with the Euro (EUR), as it had been doing since September 2011. The Swiss Franc soared against the single market currency, the Swiss market recorded losses, and many traders ended up with negative balances and the fear that their brokers would demand to get paid to cover their losses.

FCA and CySEC on Negative Balance Protection

The Financial Conduct Authority (FCA), which is the UK’s financial regulator, has informed FCA-regulated firms of the necessary provisions to meet larger capital requirements under the ESMA’s no-negative balance rules. Ongoing discussions about the new regulatory framework for Forex and CFDs brokerage firms have showed that the FCA will ask from firms that are not willing to commit to a negative balance protection policy and guaranteed Stop Losses, to cover potential risks using their own capital.

On 18th September 2017, the Cyprus Securities and Exchange Commission (CySEC), which is the Cypriot financial regulatory authority, clarified that negative balance protection will only be instituted on a per-account basis for CySEC regulated firms. This means that if a trader has two different leveraged positions with a broker, a position or funds that he/she has with the broker can be used to cover a negative balance on another. However, on the whole, a trader’s account can’t enter negative territory.

STO and Negative Balance Protection

STO offers negative balance protection on all of its trading accounts. STO is a trading name of AFX Markets Ltd . AFX Markets Ltd is authorised and regulated by the Financial Conduct Authority (FCA), and AFX Capital Markets Ltd is authorised and regulated by the Cyprus Security and Exchanges Commission (CySEC). STO ensures that its clients’ account balances won’t drop below zero, holding a positive balance in their trading accounts.

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