Broker with negative balance protection – Margin Call

On this site, I will explain to you the Margin call and how to avoid it. Brokers with negative balance protection can help you to do not make dept while trading on the financial markets. Find all details about the risk of a Margin Call.

Margin call: When traders have to pay (more than) apprenticeship fee

It is an extreme scenario, but certainly within the realm of possibility: If the market moves too strongly against traders, the equity of a leveraged position can be consumed by more than 100% and the account balance can become negative. Obligations to make additional contributions are not without danger – this was recently illustrated by the “franc shock” in January.

Facts about the obligation to make additional contributions:

  • Obligation to make additional contributions arises if the account balance is negative
  • Under normal market conditions “critical” positions are closed
  • close-out levels do not protect against price gaps and market turbulence
  • Brokers can exclude the obligation to make additional contributions in a legally binding manner
  • Guaranteed stop-loss orders protect against price gaps

Obligations to make additional contributions are claims of a broker against his customers

From a technical point of view, FX or CFD trading constantly results in additional margin requirements at the expense of traders. Each broker sets an initial margin required to open a position and a maintenance margin required to maintain the position.

If a position develops unfavorably and the maintenance margin falls below the specified value, a form of margin call already exists: Brokers grant themselves the right to close positions immediately in this case, unless the customer provides further funds immediately.

The latter is usually done silently and unspectacularly by the automatic transfer of account balances from the item “Freely available capital” in favor of “Tied margin”: as long as there are sufficient funds in the account, these are automatically used to maintain the position and can no longer be requested for payout.

Obligations to make additional contributions in the event of a negative account balance are problematic

In the event of a favorable market development you have a claim against your broker (“price gains”), in the event of an unfavorable development, the opposite is true (“price losses”).
More problematic are margin calls in connection with a negative account balance: If all equity on the trading account has been used up and all positions have been closed due to margin requirements that have not been met, the broker is in possession of a claim against his customer.

When you open an account with a CFD/FX broker (most Forex brokers allow currency pairs to trade in the legal shell of a CFD) you enter into a master agreement on margin calls. This essentially stipulates that a contract for the settlement of differences is concluded between you and the broker when you place an order via the trading platform.

This does not change in principle, just because your trading account no longer has any credit balance – the broker will then request you to make an additional contribution of capital with regard to his claim – if necessary also by taking legal action.

Practical example:

  • Price gaps in particular lead to the obligation to make additional contributions
  • The greatest risk for traders with regard to a margin call are price gaps, so-called gaps.

But how can it happen that the capital on the trading account not only suffers a total loss (100%), but that losses even exceed the total stake? Such an extreme course of the account can only be expected if the market development is equally extreme. The greatest risk for traders with regard to an obligation to make additional margin is represented by price gaps. This is to be explained using a hypothetical example, which for reasons of simplification does without spreads and commissions.

There is 10,000 € on a trading account. The account holder opens a long position in a CFD on the German share index (DAX) in the amount of 100 contracts at 10,000 € each, so that the total volume of the order is 1.0 million €. The order is hedged against price losses with a stop loss at 9950 points.

On the same trading day, a completely unexpected event occurs which is considered to be very negative. The DAX falls sharply within less than a minute, as a large number of sell orders enter the market and there are no buyers. Due to the market situation, the broker only manages to execute the stop-loss order after several minutes – at the next best price of 9,750 points. This results in a loss of €25,000, which is only offset by €10,000 in equity. The broker demands that the negative balance of €15,000 be balanced.

Swiss National BankCloseout level and stop loss do not always protect

At the beginning of 2015, a real extreme scenario occurred that forced many traders to make additional margin calls: The Swiss central bank SNB lifted the Swiss franc overnight and unexpectedly by the majority of market participants, causing the CHF to appreciate sharply and even some brokers to become insolvent.

This example makes it clear that stop-loss orders do not offer absolute protection under extreme market conditions because their execution depends on the market. The same is true for close-out levels: Brokers define margin scenarios that automatically close out positions when they occur to avoid a negative account balance.

For brokers, margin requirements are part of the calculation

For brokers, margin calls are initially a logical conclusion of the calculation of margin calls. If you lose a lot of money with a long position, another client of the same broker with an opposite position might make profits of the same amount. The broker is obliged to offset the difference with this customer. If the broker waived the obligation to make additional contributions to you, the other customer’s profit would have to be financed from other sources – for example, through generally wider spreads or additional fees.

Legally binding exclusion of the obligation to make additional contributions – and the price for it

Some brokers actually waive their obligation to make additional contributions at the expense of their customers. If you are specifically looking for such a broker, you should pay attention to the details in the small print of the contract conditions.

Statements of this type are not very reliable, as they are legally invalid in case of doubt: “Technical devices (close-out) exclude negative account balances”. This is ultimately information of little value, as every broker in margin trading uses such systems. However, they do not protect against margin calls due to price gaps and other extreme market events.

If a broker excludes these bindingly, this is accompanied by higher margin requirements and thus lower leverage effects. The reasons for margin calls are often very large financial levers in the range of 100:1 and greater. For accounts without margin requirements, the maximum financial leverage is often limited to 50:1 or lower.

CFD and Forex Brokers without margin requirements

FXCM (UK) announced in March that it would waive the first €50,000 of this amount for customers with negative account balances and insist on repayment of the portion of the claims in excess of €50,000.

Comdirect offers CFD trading via various account models, including one with the binding exclusion of the obligation to make additional margin requirements, which have been increased to 20%. The Consorsbank has also meanwhile waived its obligation to make additional margin payments, while the British broker CityIndex offers accounts with the mandatory placement of guaranteed SL orders, which, for example, IG Markets also offers for part of its catalog of underlying – as with CityIndex, for an additional fee.

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