What is a (trading) segregated account?

What is a (trading) segregated account?

Today, many brokers offer their online services to enter the main markets by trading financial tools. Online trading is currently a great success taking the conditions under which it is carried out into account is vital, especially in terms of security. One important piece of information is whether the trading accounts are segregated.

Segregated account definition

Online brokers are companies that connect customers and liquidity providers (who rate assets). In this case, the broker acts as an intermediary.

The money, which the trader deposits with the broker, must be deposited in a third-party bank on behalf of the person who deposited the money, separately from other customers. Under no circumstance can it be used directly by the broker (to maintain their working capital for instance). The online broker is compensated by the fees and commissions that may be applied but cannot use their clients’ deposits and are absolutely not entitled to use the money from this account to finance their operating expenses. The broker is under strict obligation to completely separate the segregated account from their own.

Any regulated broker therefore has a segregated account, which can also be called a separate or partitioned account. This bank account is intended for customer deposits, like a "common pot". The funds are identified by the name of the issuer and associated with the respective trading accounts of each client, whether professional or individual. Thus, the funds belong to the customers. Legally, sending money to an online broker is like making a transfer to oneself, since the issuer remains the owner of the funds.

Segregated account protection

If a broker goes bankrupt, the company must file for bankruptcy and all the money in its name is used to pay suppliers, overdrafts, etc. But sums deposited by traders can be recovered because they are in the names of customers and therefore independent from the company accounts.

In a nutshell, a segregated account is separate from the business and is not subject to the broker's operating problems.

Similarly, the segregated account also helps fight Ponzi scheme fraud, which consists in paying interest to new customers by using the money belonging to former customers. In the case of non-segregated accounts, this kind of manipulation is much easier to do.

A legal obligation

The FCA (Financial Conduct Authority) categorically prohibits the use of brokers for non-segregated accounts. Brokers are regularly audited to verify that account segregation is respected and not to replicate the case of Apari’s bankruptcy for example:

In January 2015, the broker Alpari UK went bankrupt. As a regulated UK forex broker, Alpari was required to segregate customer deposits into a segregated account but failed to comply with this requirement. Former Alpari clients are facing a long and laborious procedure with the liquidator of Alpari to recover their funds, and without any certainty of recovering all their capital.

Therefore, it is essential to research the chosen broker before starting your online trading, as well as check all the standards guaranteeing the security of the funds are observed.

Last Update on 05/10/18

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