Negative Balance Protection is a term and process adopted by forex brokers and financial regulators to protect investors and traders from excessive losses.
Negative Balance Protection is not a marketing term but an actual service provided in investing and trading.
This ensures that traders with losing positions don't end up with a negative balance in their forex trading account.
If you find yourself in a bad trade and are losing money fast, a margin call can save you from going into debt.
Before 2011 there was no protection for traders in finance when there was a rush in the marketplace, and positions could not be closed.
Negative balance protection became more critical after the Swiss franc crisis in 2015 when the Swiss National Bank (SNB) stopped holding its currency against the EUR at a fixed currency rate.
The Swiss franc rapidly strengthened against the EUR, and a lot of traders shorting the franc ended up with substantial negative balances.
They lost more than they had on their account. Several investment houses and brokers were forced into liquidation. Leverage trading increases the traders' exposure.
Benefits of Negative Balance Protection
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.
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.
This means that if a trader chooses a brokerage firm that offers negative balance protection, he won't owe money to the firm because of a wrong trading decision.
The ESMA reformed its financial governance framework, after the financial crisis that hit it at the end of 2009.
European financial regulators are trying, through the implementation of new rules, to protect consumers in their dealings with financial firms.