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Protection against negative net balances in Germany

Protection against negative net balances in Germany

created Paweł MosionekAugust 11 2017

German financial supervision (BaFin) informed at the beginning of Maythat it plans to introduce an amendment to the Act on Trading in Financial Instruments, which, inter alia, assumes the necessity of introducing protection against negative balance by Forex brokers operating on the German market. The companies under the BaFin license will be subject to changes, as well as entities operating based on its authorization (foreign brokers accepting residents from Germany). The new regulations have officially entered into force on 10.08.2017.

Protection against negative balances is an obligation

Brokers who operate on the German market must guarantee the inability to create a negative balance on the account (or rather the need to repay it) regardless of the model of execution of orders. In another case, according to the new act, it should be considered that such an entity operates illegally. This, on the other hand, may have severe consequences such as the imposition of a financial penalty, suspension or even withdrawal of the license issued by BaFin or the loss of authorization if the case concerns a broker from abroad.

Investors will benefit from the changes, who would prefer to avoid repeating the situation, for example from the memorable one, at any price January 15 2015, the day the SNB decided to release the franc rate.

No overdraft for the benefit of investors? Not necessarily

According to us, only seemingly. The introduced amendment may have a second bottom. Obviously, the introduction of this type of mechanism is intended to protect retail traders from indebtedness for which they are not prepared. Investors with little knowledge and experience who are not able to operate the left bank and manage risk will mainly benefit. Next to them will also benefit traders knowingly using the lever to the maximum, who will be able to do it even more freely.

It's just that forcing brokers to introduce this type of protection means shifting their responsibility to them for the mistakes and irresponsibility of others. While the risk in the case of Market Maker brokers is still low, in the case of market execution of orders (ECN, STP, MTF models), further profitability of running the business in an unchanged form may be put into question. This is an opportunity to increase commission fees, reduce the competitiveness of the market (through the withdrawal of these entities) or change to the MM model. You can read more about possible consequences in the following article.

Be sure to read: Protection against negative balances. Safety or shot in the knee?

There is also a risk that the brokers themselves will much more often decide to limit the leverage of their clients or raising the Stop-Out level. Such activities are undertaken by an increasing number of entities at critical moments, where there is a threat of increased amplitude of exchange rate fluctuations (elections, referenda, meetings of state leaders, etc.). In order to minimize the risk of having to pay the customer's debit by a broker, German companies may decide much more often on such a move (eg weekends, publication of macroeconomic data).

The worst scenario assumes a replay from 15 January, where it was impossible to predict in 100% the SNB decision. The newly introduced provisions could in this situation cause complications with the solvency of many brokers, and consequently the problem with the recovery of funds by traders.

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About the Author
Paweł Mosionek
An active trader on the Forex market since 2006. Editor of the Forex Nawigator portal and editor-in-chief and co-creator of the website. Speaker at the "Focus on Forex" conference at the Warsaw School of Economics, "NetVision" at the Gdańsk University of Technology and "Financial Intelligence" at the University of Gdańsk. Twice winner of "Junior Trader" - investment game for students organized by DM XTB. Addicted to travel, motorbikes and parachuting.

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