Forex trading is a risky business, much like many other forms of investment. Any trader should be concerned with keeping their capital as safe as possible. The whole concept of making an investment involves an element of risk, so it is vital to keep all other uncertainties to a minimum. One way this can be done is to choose a Forex broker with segregated accounts. We should point out, however, that this doesn’t offer 100% protection of your capital, but it is most definitely a step in the right direction. Keep reading if you’re not too sure what segregated accounts are, because we’re about to explain. And even if you know the basics, stay with us because we can help you understand what happens in the event of a Forex broker being declared bankrupt or going into liquidation.
What does “segregated accounts” mean?
When a Forex broker states that they use segregated accounts, it means there is a dedicated account where client funds are kept separate from the broker’s operating funds. In the Forex industry, a number of brokers choose to open segregated accounts for their customers, but this can also be a stipulation made by a particular regulatory body. The separate accounts are usually joint ones, used for all client funds, or individual ones that are generally negotiated for larger clients.
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Segregated accounts are used to protect customer investments, and to keep a broker from using client funds in the course of their ordinary business. It prevents Forex brokers from using client funds for expenses, obligations, or for their own risk. If a Forex broker’s company account becomes overdrawn, for example, they might be tempted to use client funds to redress the balance. But if a broker is using segregated accounts this is not possible.
Are segregated accounts all they’re cracked up to be?
Sadly, they are not. There is a lot of misinformation relating to segregated accounts. As we’ve already explained, segregated accounts mean your trading capital is kept in a separate account from the money a broker uses for the operation of the business; and of course, this can only be considered a good thing. In the past, brokers were known to deposit client funds into their operating account, which meant it was available to be used for all sorts of purposes. Nowadays, when client funds are generally held in segregated accounts, such practice is not typical. But what does it really mean?
Does a segregated account mean you have your own bank account with a broker? No, it doesn’t, unless you negotiated this kind of option. However, separate bank accounts are generally only offered to high-volume traders. Typically, a segregated account is where all of a broker’s client funds are kept together. If one particular client has a negative balance, it is possible for the deficit to be taken out of the segregated account, although a broker will usually top it up.
Are brokers able to use funds in a segregated account for margin? Yes, they are. The funds in a segregated account can be used for margin should it be required to put up positions it holds. Essentially, your funds are available to be used as margin on another client’s position.
Will your funds be protected if a broker goes bankrupt? Once you hand over funds to your broker they essentially become the broker’s to do with as they see fit. Should the unfortunate situation arise whereby the broker is declared bankrupt and has more debt than operating capital, it is possible for the segregated funds to be used to pay off the debt. You may or may not get your money back, depending on whether there are other creditors in line whose funds are secured, or on the rulings made in the insolvency process.
Please don’t be confused into thinking segregated accounts are a bad thing, though. They do offer a certain degree of protection, and are most definitely a better option than choosing a Forex broker without segregated accounts.
What will happen to your funds if a Forex broker is declared bankrupt?
Thankfully, it doesn’t happen too often, but there have been cases of Forex brokers being declared bankrupt. What happens to client funds when this happens depends on the regulations and law of the country where the broker operates and holds accounts. In order to give you some kind of idea, let’s look at what happens in the UK and Switzerland.
What happens when a Forex broker is declared bankrupt in the UK?
In the UK, client funds are protected should a broker be declared bankrupt. The broker’s creditors, banks, or company liquidators aren’t able to take compensation from client funds. There are a number of schemes running in the UK, and compensation is paid according to individual schemes and current regulations. It is therefore in your own best interests to get in touch with an individual broker for more details.
What happens when a Forex broker is declared bankrupt in Switzerland?
The process is slightly different for Forex brokers located in Switzerland. It is usual for a liquidator to be appointed by the Federal Banking Commission The liquidator is responsible for ranking client funds as a general unsecured creditor or failed company.
To be certain of the rules and regulations that apply in your own country it is advisable to contact the recognised regulatory body, who will be able to advise you of the latest level of protection of your funds.
When you first start trading Forex there are a number of important decisions you are forced to make. You have to decide whether there is a better trading platform; how you want to fund your trading account; what kind of service you’re looking for; whether you want free VPS; and a whole host of other important factors to take into consideration. Our best advice will always be to start slowly. Spend some time learning what it is all about, and understanding some of the pitfalls. Stay with us and we’ll share everything you need in order to make the best decisions.
