The myth of segregated accounts in Forex and CFDs

One thing that I find quite funny inside the world of “brokers” is that which makes reference to segregated accounts since it is supposed that a good broker has to have its clients accounts segregated from its own accounts.

The brokers that belong to the main regulatory bodies like FCA, NFA, ASIC, etcetera, must have their customer’s accounts segregated by law.

What are segregated accounts?

Well, the word already implies what it really is: that the customer’s accounts are held at a different account that that of the broker.

This happens to be normally a “global account” whether it is in futures, CFDs, Forex, stocks, binary options or whatever.

Is this dangerous?

Yes, it is, but as everything else in the world of trading.

If you are not willing to take risks you had better do another thing.

The broker has two types of bank accounts: its own bank account where it keeps its operational money, so to speak and other where it keeps the customers money, in other words, the segregated accounts.

In theory the broker should not take this accounts under any circumstance, unless to do deposits and withdraws of the money.

As simple as that.

However, as some good examples have shown in history, reality is quite far from theory and “segregated accounts” were not as safe as they tell us.

If the broker is poorly managed or simply has fraudulent members there is nothing we can do to stop it from taking our money in one or another way.

MF Global bankruptcy and segregated accounts.

MF Global was one of the main independent brokers in the futures markets, in many years, the biggest futures broker in the world.

We are not talking about some tax haven broker from the Caribbean but of a world powerhouse in the financial markets.

This broker had many accounts and of huge sizes.

Well, this broker was managed by Jon Corzine, a former United States senator, quite close to Michael Obama.

It was under the management of this man that this giant collapsed in a dramatic way in the middle of total chaos.

The accounts and movements inside the broker were so complex that years later it was still not very clear what had happened to many customers’ money.

I suppose the truth was known to several people in the group, including Corzine.

All in all, this broker had its own trading division, or prop trading, which used to give liquidity to the markets, plus taking some speculative orders.

Some of MG Global speculative orders were on PIGs bonds during the years of the European bond crisis. Those orders could not be closed in time and created terrible losses.

When MF did not have more margin to cover those positions, the managers of the brokers decided to use the customer’s money as collateral, besides whoever knows what else.

Consider that this was done by one of the main brokers of the United States, supposedly one broker that should have all the guarantees in the World.

Some years later the customers recovered some part of the money but not without very long legal battles and very bad personal situations where most of some people all life savings had evaporated instantly.

If this was done by one of the main global brokers what could not we expect from others?

Evidently, the term “segregated accounts” sounds very well but as well as everything in this life there is nothing secure and the word segregated stays there: just a word, since in fact any broker can access its customers accounts any time.

In the end this is nothing more than a dialectic game.

Is it true that the brokers do segregate the money of their customers?

Yes

Is it possible that the broker breaks that rule and use that money without any chance for the customer to know?

Yes.

This is why I find quite funny to see all the brokers out there claiming that they have segregated accounts.

Although, how do we know they really do that, especially if those brokers are based in exotic countries?

If the broker wants to play with our money it will eventually find the way to do so.

Problems with segregated accounts will continue to happen whether the broker is Alpari, MG Global, PFG Best, Interdin or a bucket shop in the Virgin Islands.

Unfortunately there is not an infallible way of detecting when a broker is in trouble.

After all, the business world is full of successes and failures, of companies that open and close and of uncountable scandals.

The only thing we can do is to try to choose regulated brokers and try not to have all our savings in the same broker, and pray a bit perhaps.

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