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An important issue in CFD trading is the security of client funds in the event of a CFD broker’s insolvency. CFD brokers who are members of a protection scheme are considered relatively stable. Deposits are thus protected up to a certain amount in the event of insolvency. However, it is up to each broker to decide in what form he hedges his customer funds.
There are considerable differences here, even though most brokers are based in an EU member state. With regard to deposit insurance, a distinction must be made between two situations. If a broker becomes insolvent, customers can have two different types of claims against him. Firstly, claims from credit balances on customer accounts that were not involved in open transactions. Second, receivables from open transactions.
Find the right CFD broker
CFDs work with levers. Our comparison will show you which CFD brokers are particularly safe thanks to measures such as the exclusion of a margin call or guaranteed stop-loss orders:
Segregated customer accounts with resilient deposit protection
If a broker does not have a banking licence, he is not allowed to accept deposits himself. The client’s money is then deposited with banks. Custody must be carried out separately from the broker’s business assets and in segregated customer accounts, i.e. accounts that can be allocated to individual customers.
If a broker holds a banking licence himself and manages the customer funds himself or if the bank entrusted with the custody becomes insolvent, the statutory deposit insurance should take effect. An EU directive requires member states to maintain a national deposit insurance scheme that covers assets up to €100,000 per customer in the event of insolvency (in EU member states outside the euro monetary union, other limits may apply) without a deductible.
However, the statutory deposit insurance is not an unconditionally trustworthy guarantee.
- It does not constitute a legal claim against a state.
- States can also become insolvent – the Cyprus crisis in spring 2013 has made this clear most recently for one of the largest CFD broker locations in Europe.
- Investors should therefore also take into account the state of a country’s financial sector as well as the state of public budgets. Most Cypriot-based brokers have switched to depositing client funds with banks in Germany or the UK.
These funds are then not at risk in the event of possible turbulence in the Cypriot financial sector. By definition, deposit insurance does not cover claims of investors against brokers from open CFD transactions. In principle, these claims flow into the insolvency estate in the event of the broker’s insolvency. Customers of the FX Direktbank, which became insolvent at the end of 2012, were at least partially compensated by the Entschädigungseinrichtung der Wertpapierhandelsunternehmen (EdW).
The amount of compensation from this institution is limited to 90 % of the amount of the claim or a maximum of € 20,000. Most German brokers are linked to the EdW.
German brokers are subject to the German deposit insurance
Every customer of a CFD provider has a clearing account through which all CFD transactions are settled. In the event of insolvency, these customer deposits with a broker based in Germany are 100 percent legally protected via the compensation fund of German banks up to a maximum of 100,000 euros. In addition, CFD trading, which is backed by a German broker, is regulated by BaFin. This is another important criterion which you should definitely question.
Meanwhile criteria such as “German CFD broker”, “German provider” as well as “deposit protection” are becoming absolutely decisive for the selection of a CFD provider. We therefore recommend CFD brokers with German deposit protection.
As in Germany, customer funds in the UK must also be held in separate accounts. Here the brokers are under the British Financial Services Authority. Customer deposits are secured with 50,000 pounds.
There are similar security systems for receivables from open transactions in the UK, Cyprus and other countries. In Great Britain, for example, the FSCS is responsible. In Cyprus there is the Investor Compensation Scheme (ICF).
In addition to deposit protection, the regulatory environment also plays a role. In principle, the standards in Germany or Great Britain are significantly higher in this respect than in Cyprus or Bulgaria, for example.
The EU Markets in Financial Instruments Directive MiFID, which all EU member states have ratified, does not change this. Only the regulatory authority in the broker’s home country is relevant. Many CFD brokers list several financial supervisory authorities in their imprint, which are then only responsible for branches abroad.
The responsibility for branches is essentially limited to checking the correct postal address. For brokers based in Germany, the Federal Financial Supervisory Authority (Bafin) is responsible. The relevant authority in Great Britain is the Financial Conduct Authority (FCA). Brokers in Cyprus are regulated by the CySEC.
Anyone wishing to find out about the integrity of a broker can consult the websites of the regulatory authorities. There, notices about brokers are published, e.g. if their license has been revoked or if they advertise customers with a wrong or non-existent registration number.
Further criteria to influence security itself
- With foreign CFD brokers, make sure that deposit protection or regulation is in place. If you are unsure, contact the CFD provider.
- The stability of the trading platform is another important selection criterion.
- Almost all CFD providers are market makers, so traders are only provided with prices close to the stock exchange. If you want to be on the safe side, choose a broker that offers DMA trading, but then you have to expect higher order fees.
Even if the deposit protection is a basic protection of the deposits in the case of insolvency of the broker, CFD trading is overall a speculative business. For this reason a good money management is at least as important for the trader to carry out a successful CFD trading.
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