The first thing you should do after you have decided to give forex trading a try is to choose a broker. You should always turn to reputable, reliable companies that you are sure you can trust – and there is no better way to be sure of a broker’s trustworthiness than a solid license issued in a strict jurisdiction. The EU has made a name for itself because of the many requirements it has for brokers, and the many protections client benefit from. Cyprus specifically has established itself as a main EU regulatory hub in recent years, but laws and procedures throughout the EU are standardized and more or less the same for all EU forex broker.
Why Should You Choose an EU Forex Broker?
Minimum Capital Requirments and Compensation Schemes
In order to prove that they are well-capitalized, financially stable, and here to stay, all EU forex brokers are obligated to maintain a capital of at least €730 000 in order to operate. We say at least because that is the bare minimum – brokers who have more clients might be specifically asked to have multiple million euros available. This money means that the broker would be able to counteract and cancel out all potential losses it might suffer.
However, in the event of a broker becoming insolvent, there are additional protections. All licensed EU brokers provide funds for compensation schemes which means that you could receive a compensation of up to €20 000 (depending on the size of your investment), in case your broker goes bankrupt.
Segregation of Client Funds
When you deposit money with an EU licensed broker, your money does not automatically go into the same bank account where the broker keeps its own operational capital. The accounts where your funds are kept are managed by independent third parties – other licensed financial institutions. There are a few benefits to that – firstly, your money and the broker’s money can not get mixed up and you can rest assured that your funds are not being used for any of the broker’s own financial operations. Secondly, client account segregation means more transparency and more control over your money – withdrawals become significantly faster. And lastly, in the event of the broker going bankrupt, your money would be protected and would not get lost.
Negative Balance Protection
As a client of a regulated EU broker, you would not have to worry about losing more money than you have in your account. The Negative Balance Protection Policy means that if your account balance goes below zero, the broker would not come knocking on your door looking for those extra funds you have lost. Keep in mind that this protection only exists for retail clients – qualified professional traders are not safeguarded by the policy.
Transaction Reporting
In order to ensure full transparency, EU forex brokers are obligated to regularly report all client transactions to authorities. With such a broker, you would always be sure how exactly your money is being handled – and who is handling it.
What Are the Downsides of Trading with an EU Forex Broker?
Limited Leverage
According to current EU regulations, all EU brokers are only allowed to offer leverage of up to 1:30 to retail clients. To trade with anything higher than that, you would have to qualify as a professional trader and meet some additional requirements – to have net capital larger than $500 000 (in assets, investments, fiat money, etc.), to have worked on a relevant position in the financial sphere for at least a year, or to have made at least 40 significant trades (of at least $50 000 per trade) in the past year. If you meet two of these three conditions, you could be on your way to becoming a professional client. For everyone else, leverage is limited to 1:30 for trading major currency pairs and even less for trading more volatile assets – like minor currency pairs, gold, and major indices (1:20), commodities and minor indices (1:10), equities (1:5), and cryptocurrencies (1:2).
And although these restrictions are imposed with clients’ safety in mind and are meant to limit losses, more experienced traders who for one reason or another cannot or do not want to become professional clients might find these numbers quite limiting.
No Bonuses
Since 2018, bonuses have officially been banned in the EU. The authorities’ viewpoint is that the bonuses offered by many brokers are a danger to novice traders because they come with many additional conditions and because these beginner traders usually view bonuses as “free money”. It is easy to see how such a mindset could lead to mistakes and monetary losses.
However, it is not bonuses themselves that are the problem – it is the mindset of “free money”. Many brokers based outside of the EU still offer different bonuses, promotions, loyalty programs, and trading contests that can lead to attractive prices. If you understand the conditions around the bonus and that it is mostly intended as a means of giving you a little extra push, there is nothing wrong with receiving some extra money from the brokers. Sometimes these bonuses cannot be withdrawn at all and are a way of increasing your trading potential, sometimes they are available for withdrawal at some point, usually after you have met certain minimum trading volume requirements. However, no legitimate broker, EU or otherwise, would ever deny you access to your own deposits and any of your profits. In case you want to withdraw those deposits and profits, the broker might just subtract a percentage of the bonus amount.
A License Does Not Necessarily Mean Good Conditions
Keep in mind that some brokers, although licensed, can still offer unimpressive trading conditions. That is usually not the case with big market players who compete with one another but smaller, newer brokerages might sometimes provide a less lucrative trading environment. They might not offer a choice between different account types, ask for higher minimum deposits, have wider spreads, or bigger commissions. Don’t just get gaslighted by the solid license and all the perks that come with it – read all conditions carefully, and always do your own research.
