Negative Balance Protection

Negative balance protection represents a defense mechanism adopted by retail forex brokers to safeguard investors and traders from excessive losses.

A 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.

It is important to note that negative balance protection is not a marketing term, but instead an actual service provided for investors and traders.

As such, this service ensures that traders with losing positions don't end up with a negative balance in their forex trading account.

One way to also prevent against this is a margin call, can close a position or account to prevent racking up debt.

Prior to 2011, protections such as these were virtually nonexistent for traders in markets when there was a rush in the marketplace, and positions could not be closed.

Why Negative Balance Protection Matters

Negative balance protection became more important after the Swiss National Bank (SNB) Crisis in 2015 when the central bank abruptly abandoned its currency peg with the EUR.

The fallout was the Swiss franc rapidly strengthened against the EUR, and a lot of traders shorting the franc ended up with substantial negative balances.

In many instances, traders lost more than they had on their account and even several investment houses and brokers were forced into liquidation.

This issue was exacerbated by leverage trading, which also increases the traders' exposure.

To help prevent this, negative balance protection means that you cannot lose more than the funds you have on deposit.

This is a precautionary measure that brokerage firms take to safeguard their clients. European financial regulators are also trying to make mandatory these measures, through the implementation of new rules, to protect consumers in their dealings with financial firms.