Client Money Segregation

What happens without it

A broker that mixes client money with its own can use deposits to pay staff, fund marketing or cover its own trading losses. When such a broker fails, clients become unsecured creditors, queuing behind banks and the tax authority for whatever is left. Several well-known collapses left clients with a fraction of their balances for exactly this reason.

What segregation requires

• Client money held in designated trust accounts at banks, separate from company funds.
• Daily or regular reconciliation of what is held against what is owed.
• Rules on which banks may hold it and in which countries.
• Audits and reporting to the regulator.

Who requires it

The FCA, ASIC, CySEC and the other European regulators, the Monetary Authority of Singapore, Japan's FSA and the Dubai Financial Services Authority all require segregation for retail client money. Many offshore regulators either do not require it or require it without checking. A broker that says client funds are held in segregated accounts is making a claim; a broker regulated somewhere that enforces it is making a promise someone checks.

The limits

Segregation protects your cash balance, not your open positions, which are contracts with the broker. It does not protect you if the bank holding the money fails, and it does not stop a fraudulent broker simply lying about it. That is why segregation works alongside capital requirements, audits and, where available, compensation schemes rather than instead of them.

Key takeaways

• Segregated client money is held on trust and returned to clients if the broker fails.
• Strong regulators require and check it; weak ones may not.
• It protects balances, not open positions, and depends on the broker actually doing it.