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Negative Balance Protection - Consequences of Changes in Great Britain

Negative Balance Protection - Consequences of Changes in Great Britain

created Paweł Mosionek21 February 2018

The specter of new regulations is still hanging over the European Forex market. In addition to the ability to limit the leverage to the value of 1: 30, and even 1: 5, the voices about the idea of ​​ESMA to introduce mandatory protection of retail investors before the negative balance on the account are not weakened. The said protection would be an absolute safeguard that would make it impossible to lose more funds than those on the trader's account.

Negative Balance Protection - Consequences

Is the introduction of this security a good idea? Opinions are divided (read: Negative Balance Protection - Safety or a Shot to the Knee?). Although, for the time being, this protection only rests on the Cypriot and German brokers, a large group of companies from other countries, including Poland, volunteered for a similar step. This of course involves transferring the risk from the client to the broker in a situation of a sudden collapse in the market and not triggering the mechanism Stop-Out.

Check it out: Forex brokers and debit protection - 2018 statement

Meanwhile, the British stock market supervisor, FCA, has decided to set certain capital requirements that brokers must offer to protect against debit. This is related to the risk of bankruptcy of the broker, who would be forced to cover the indebtedness from his own pocket, for example in the case of the 15 revision of January 2015 (freeing the franc rate by the SNB). The British regulator sent letters (so-called Capital Requirements Directive) to licensed entities, where it informs about changes in the regulations regarding increased capital requirements.

There are concerns that some brokers may be exposed to the resulting excessive costs, which is also acknowledged by the FCA itself. And it is precisely because of the type of authorization and license they use. What is it actually about?

The type of license matters

There are two types of licenses in Great Britain, the so-called IFPRU 125K and IFPRU 730K. What's the difference? The first type of license applies to companies that must have a minimum of £ 125 of equity, while IFPRU 730K is similar to those with a capital of at least £ 730. But this is not the end, because there are more differences. There are also differences in obligations and rights.

Brokers with the 125K license will be forced to transfer the risk of debit repayment to their liquidity providers, who deal with the settlement of their clients' transactions. However, if in the case of this type of incident you refuse, then the obligation to settle the amount will rest on the broker itself. Therefore, the activities of these companies will require them to raise capital to the appropriate level required by the supervisory body.

125K licenses have as many as 23 entities from the XDUMX group of CFD companies regulated by FCA. The regulator itself sent notifications to the said group of brokers suggesting that they should consider the possibility of switching to the 97K license if, in their opinion, they are not able to guarantee effective protection against the creation of a negative balance. There is a risk that smaller brokers will not be able to collect the required capital, or will not have enough time to update the authorization in the FCA before the ESMA regulation enters into force.

In the face of the introduced changes, the probability of the mergers and acquisitions among the Forex brokers in the next few months increases. As a consequence, only the strongest can stay in the game, which will probably translate into a reduction in competitiveness.

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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.