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Leverage and negative balance: risks and responsibilities


Guest Thomas

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Guest Thomas

Dear,

I'd like to better understand what can happen in an extreme case scenario relying on the use of leverage, e.g. with CFDs.

In theory and with proper money/risk management, this should not happen, but if a leveraged position gives rise to a significant loss:

- IG will perform a call margin if the margin level is just above a given threshold

- If the margin is not sufficient, IG will close open positions to free up margin. What are the rules behind, are the last opened positions closed?

- If the margin is not sufficient and the account balance becomes negative, what happens? Different situations might lead to such a rare situation (unlikely especially in the case of a conservative risk and money management from the trader/user): a bad trade/money management, a lack of liquidity/counter party preventing the client to close a loosing position (similarly, the spread is expected to be high), an exceptional market event (black swan, e.g. flash crash, unexpected strong change of monetary policy,...), a price gap at market opening, etc... for each situation, what are the responsibilities between IG and the client regarding the risks and negative balance? Could there be a debt to be paid by the client to IG, given that the latter is also responsible for risk management and to provide sufficient liquidity? Is IG supposed/responsible to do everything that is needed to avoid such situations to occur? Could a client see his/her negative balance be set to zero by IG and afterwards continue his/her operations with new funds?

Finally, are these scenarios and responsibilities described in the contract between IG and clients?

Looking forward better understanding these aspects;

Thanks and regards,

Thomas L

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