Are You Responsible for Negative Account Balances with Your Forex Broker?
24 Years ago | January 20, 2015 12/2/23, 12:00 AM
I have gotten several emails from traders who got hurt by the SNB decision to abandon the defense of EURCHF 1.20 and subsequent gap higher in the CHF. The questions range from whether a forex broker has a right to subjectively set a rate for the execution of a stop order to what to do about a negative balance the broker is asking you to pay. The latter is the more pressing issue that I will attempt to address as it affects all who trade retail forex.
What is Margin?
Margin is a good faith deposit that does not limit your loss or potential liability for an open trading position. In other words, you can be liable for losses that exceed your account balance. This is a rarity in retail forex trading as accounts are monitored in real-time on electronic platforms and open positions are closed once margins are no longer sufficient to support them. The following is a clause in a broker client agreement (broker name omitted):
Margin Requirement. You agree to deposit and maintain in your Account sufficient funds to meet BROKER’s Margin Requirement, and acknowledge that BROKER is not required to provide you with time to respond prior to a Margin Closeout when in its sole discretion BROKER deems it necessary to take immediate action.
However, there are exceptions, especially when there are gaps but in the history of forex trading there has never been one in a major currency to the extent seen after the SNB decision. This is why many traders are getting notices of negative account balances that exceed their account balances by several times. I call it a once in a lifetime event but one that should act as a reminder that surprises can occur that can cause gaps in the market, although no event like this one has occurred that has caused so much pain, although In the early 1980's, we saw an event similar to this in silver futures.
Are You Responsible for the Negative Balance?
I wish I could wave a magic wand to make it go away. However, this is not the case as the broker is going to try and collect the balance from you. I suggest reading the fine print of your customer agreement, which I am pretty sure says the broker has a right to collect on negative balances.
How effective the broker will be in collecting depends on several factors, such as your personal financial situation, whether you choose to pay, settle or ignore, local laws in your jurisdiction and any reciprocal treaties with the affected broker, etc. .
In any case, I suggest consulting an attorney and look out for class action laws suits as there is going to be all sorts of litigation as this gets sorted out.
This is Where the Global Traders Association Acts as an Advocate
In our advocacy role, we want to gather information on traders’ rights regarding negative balances in their accounts. In this regard, we ask you to send us any information you have on this issue, what your lawyers have said, what you plan to do, what you are hearing from your brokers, etc. as we will pass it on to our members.
Send to: jay@tradersadvocate.com
In the meantime, we will be doing our own research and investigation into this issue as well.
Jay Meisler, founder
Global Traders Association
jay@tradersadvocate.com
