The margin close out rule is the margin level below which a CFD broker must close a retail client’s open positions. Since August 1, 2018, this threshold has been set at 50% of the required initial margin, calculated by default at the whole-account level, as specified by the European Securities and Markets Authority (ESMA).
Why ESMA set this threshold
In 2018, ESMA adopted a series of product intervention measures on derivatives marketed to retail clients, among them the standardization of the margin close out threshold. The stated goal was to harmonize a practice that had previously varied across brokers, by imposing a common level across the entire European Union. ESMA’s text states it this way: “A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs” (ESMA, June 1, 2018 announcement). The measure took effect on August 1, 2018, for all CFDs offered to retail clients across the European Union.
How the threshold is calculated, per account or per position
By default, the calculation is done at the account level: as soon as the sum of available funds and unrealized profits across all open CFD positions falls below 50% of the total initial margin required for those positions, the broker must close one or more positions, under the conditions most favorable to the client. ESMA has however confirmed that a CFD provider may apply the rule on a per-position basis rather than per account, still at the same 50% rate of the initial margin required for that specific position, as reported by a specialized law firm: “ESMA has confirmed that a CFD provider may instead impose a margin close out rule on a per position basis at 50% of the initial margin requirement for the specific position” (McCann FitzGerald). ESMA’s preparatory document of March 27, 2018 already used this 50% of minimum required initial margin wording, before the final publication in the Official Journal.
This 50% rate sits within the same regulatory framework as the initial margin itself, whose percentage varies depending on the underlying asset category of the CFD.
What the margin close out rule guarantees, and what it does not
The margin close out rule limits the extent of losses by cutting positions before they reach a catastrophic level for the account. But it does not, on its own, protect against a negative balance: in the event of a violent market move, the close out execution may occur at a price less favorable than the one that would have exactly neutralized the loss, leaving the account in negative territory. A distinct measure, negative balance protection, guarantees that the client can never lose more than the funds deposited in the account. ESMA clearly distinguishes the two mechanisms in its announcement: “Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses” (ESMA). The margin close out rule acts upstream, to reduce the probability that an extreme loss occurs; negative balance protection acts downstream, as an ultimate safeguard.
| Mechanism | Threshold or scope | Effective date |
|---|---|---|
| Margin close out rule | 50% of required initial margin | August 1, 2018 |
| Negative balance protection | Overall limit on losses at the deposited amount | August 1, 2018 |
| Per-position calculation (broker’s option) | 50% of the position’s initial margin | August 1, 2018 |
Frequently asked questions
Does the margin close out rule apply to all CFD traders?
No, it specifically concerns retail (non-professional) clients within the European Union. ESMA’s measures, of which this rule is part, govern the marketing of CFDs to this category of clients since August 1, 2018.
What actually happens when the 50% threshold is reached?
The broker must close one or more of the client’s open positions, under the conditions most favorable to the client, as soon as available funds and unrealized profits fall below 50% of the required initial margin. This calculation is done by default at the level of the entire account.
Does the margin close out rule prevent a negative balance?
Not on its own. It reduces risk by cutting positions before an extreme loss, but a fast market move can still push the balance into negative territory during execution. It is negative balance protection, a distinct mechanism, that guarantees the client’s losses never exceed the funds deposited.
Can a broker calculate this threshold per position rather than per account?
Yes, ESMA has confirmed that CFD providers can choose to apply the close out rule on an individual position basis, still at the rate of 50% of the required initial margin for that specific position, rather than applying it globally to the entire account.
To go further on related margin mechanisms, see our article on required margin on a CFD depending on the asset category and the one covering negative balance protection, which details what this guarantee actually covers.