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Brokers With Segregated Accounts

Written By

Jemma Grist

Written By

Jemma Grist

Jemma is a writer, editor and fact-checker focused on retail trading and investing. Jemma brings a unique perspective to the forex, stock, and cryptocurrency markets and works across several investment websites as a researcher and broker analyst.

» Jemma Grist Profile Page

Edited By

James Barra

Edited By

James Barra

James is an investment writer with a background in financial services. As a former management consultant, he has worked on major operational transformation programmes at prominent European banks. James authors, edits and fact-checks content for a series of investing websites.

» James Barra Profile Page

Fact Checked By

William Berg

Fact Checked By

William Berg

William contributes to several investment websites, leveraging his experience as a consultant for IPOs in the Nordic market and background providing localization for forex trading software. William has worked as a writer and fact-checker for a long row of financial publications.

» William Berg Profile Page

Updated

Jul 15, 2024

A number of high-profile trading brokers and exchanges have gone bankrupt in recent years without suitable liquidity and client fund protection measures. As a result, investors are becoming increasingly aware of the importance of trading with a broker that holds customer funds in segregated bank accounts.

This article explains the pros of brokers with segregated accounts and how to compare providers. We also list the dangers of signing up with trading platforms that do not separate operating capital from traders’ funds.

Use our list of the top brokers with segregated accounts for a secure trading experience:

Segregated Accounts Explained

In trading, a broker that uses a segregated bank account holds client funds separately from company capital. This means the broker does not use its customers’ funds for trading, lending, or other purposes.

The top trading brokers conduct regular audits of their segregated asset accounts to give investors peace of mind regarding their funds. The most secure brokers also store client funds in reliable, Tier-1 bank accounts to offer maximum protection.

Why Are Brokers With Segregated Accounts Important?

Many traders assume their funds are safe with a trading broker or online exchange. However the collapse of several big names, such as FTX, has brought the importance of using a brokerage with segregated accounts into sharp focus.

When a broker keeps client funds segregated from company capital, the firm can theoretically pay out all of its clients should they wish to withdraw their net balance. However, firms that do not use segregated accounts can be exposed when many traders want to take out funds, leaving users empty-handed.

Mass withdrawals often have a knock-on effect when more and more investors scramble to get their capital, spiralling the broker into financial difficulties.

This was illustrated when, despite being a CFTC-regulated crypto exchange, FTX used client funds as capital to invest through their sister company – Alameda Research. A wave of client withdrawal requests exposed that FTX did not have the means to cover all of its clients’ withdrawals.

However, FTX is not the only trading provider that has used client funds for its own purposes. MF Holdings also used client funds from supposedly segregated bank accounts to cover their margin obligations. The CFTC fined the brokerage $100 million, and after a year, investors received their funds back.

How To Check If A Broker Uses Segregated Accounts

While many of the largest brokerage firms use segregated bank accounts to protect client funds, investors should never assume that their capital is safe.

With forex brokers, general investment brokers, crypto exchanges or any other online finance company, information about segregated accounts is usually found on their website.

When you’re on a broker’s website, navigate to the “About” section of the site. Many forex brokers will advertise their fund protection measures here, but if not, there will usually be a separate section for “Regulation” or “Safety of Funds”.

Another port of call is checking on a trusted broker review site like ours to see if our experts have confirmed whether the broker uses segregated bank accounts to store traders’ funds.

In addition, traders should consider any stipulations to these segregated holdings. For example, as the CFTC allows brokers to invest client funds in approved global government securities, some firms may hold substantial amounts of client capital in this form.

This may make funds illiquid or, in the event of a significant regional economic downturn, even not have investors’ supposedly safe segregated capital.

For example, Interactive Brokers‘ segregated accounts have exposure to US Treasury securities. Even the largest brokerage firms, if holding client funds this way, may be affected by a significant economic incident.

Regulation & Segregated Accounts

The most reputable financial regulators will require securities and forex brokers to hold client funds in segregated accounts. These bodies include the UK Financial Conduct Authority (FCA), the Australian Securities and Investments Commission (ASIC), the Cyprus Securities & Exchange Commission (CySEC), and the US Commodity Futures Trading Commission (CFTC).

However, as demonstrated by the collapse of FTX, this does not apply to crypto exchanges – very few of which are regulated regardless.

Other forex broker regulators include the Belize-based International Financial Services Commission (IFSC) and the Vanuatu Financial Services Commission (VFSC).

These regulators also require brokers to hold client funds in degraded accounts. However, their checks may not be as routine or stringent as more trusted licensing bodies.

How To Approach Non-Segregated Account Brokers

Some brokers and online financial providers may not have any such assurances or may not have the regulation to underscore their claims. In this case, it is an investor’s responsibility to conduct their due diligence.

Some brokers or exchanges, such as the Kraken crypto exchange, may conduct independent audits of their holdings to reassure investors that their cash is safe.

However, some unregistered brokers do not segregate client funds from their own. This is especially common with less regulated sections of the finance industry, such as binary options brokers and crypto exchanges.

Traders should only hold what they can afford to lose with such brokers at any time.

Advantages Of Brokers With Segregated Accounts

• Safety – When trading with brokers with segregated accounts, investors’ funds are protected from misuse by a company.
• Indicates trustworthiness – While not a full indicator of a brand’s credentials, brokers with segregated accounts are more likely to be trustworthy and highly regarded.
• Access to funds – Brokers that have segregated asset accounts can pay out on withdrawal requests from a high volume of clients without having to restrict access.

Disadvantages Of Brokers With Segregated Accounts

• Less choice – If only trading with brokers that use segregated bank accounts, investors may be limited in choice for markets like cryptos or binary options.
• Not 100% reliable – Without regular audits by an independent company or a stringent regulator, brokers can break the rules and use client funds for their own trading or to cover liabilities. So it is not a full-proof security measure.

How To Compare Brokers With Segregated Accounts

When it comes to choosing a broker that uses segregated accounts, look for the following qualities:

• Regulation – A broker regulated by a reputable licencing body is more likely to offer solid protection to investors from fraud. Among the top agencies are the FCA, ASIC, and CySEC.
• Low fees – Brokers with zero commission and low spreads are often favored by traders. These can help protect profit margins, especially if you are actively day trading.
• Wide range of trading assets – Ensuring that a broker supports your favored trading markets is important, whether that’s major forex pairs, stocks and shares, or precious metals like gold.
• Trading platforms – Traders will have different requirements. Some investors may prefer simple and accessible web-based software, while more experienced speculators may require advanced, capable platforms like MetaTrader 4 or MetaTrader 5.
• Customer support – A dependable and knowledgeable customer support team can be critical when investors find themselves with urgent trading issues. The top brokers with segregated accounts offer 24/5 or 24/7 support through live chat, phone and email.

Segregated Accounts VS Separate Accounts

While separate and segregated fund accounts sound similar, they are different. Separate accounts are bespoke investment accounts, usually co-managed with a professional wealth manager or firm.

Segregated accounts refer to client funds being held in segregated bank accounts, meaning brokers cannot use client funds to trade, loan or invest.

Other Useful Security Measures

In addition to brokers with segregated accounts, here are a few more security measures to look out for when trading online:

Fund Protection & Insurance

Choosing a broker that offers insurance for trading funds is another way to help protect your capital. Some brokers are signed up to fund protection schemes such as the Financial Services Compensation Scheme (FSCS) as part of their regulatory obligations. The FSCS protects client funds up to £85,000 per account.

Some trading brokers offer additional insurance, sometimes exceeding $1 million, to provide clients further peace of mind. These programs are underwritten by prominent insurance companies that regularly ensure firms hold a significant amount of free capital.

Negative Balance Protection

Losses can quickly build up when trading using leverage or margin on volatile markets such as forex or CFDs. While you can always set a stop-loss level to prevent significant losses, using a broker that employs negative balance protection (NBP) is also recommended.

Negative balance protection ensures that a trader’s funds never dip below zero. Brokers do this by liquidating any positions that would cause this and restoring negative balances to zero if positions cannot be automatically closed in time.

Audits

As outlined above, the best way to ensure that a broker is using segregated accounts is to pick a company that conducts regular independent audits of its finances. These checks can be done by regulators or, in the case of some brokers such as the Kraken crypto exchange, by third parties.

Two-Factor Authentication

Many brokers offer two-factor authentication (2FA) to secure their client’s trading accounts. This measure requires a one-time passcode when they log in.

Often tied to a trader’s registered phone, this can prevent fraudulent login attempts even when an account’s primary password is exposed in a data breach.

Final Word On Brokers With Segregated Accounts

Using a broker or exchange with segregated bank accounts for client funds is a no-brainer when trading online. While investors may be restricted to a select few crypto exchanges and binary options providers, the safety benefits of a broker that does not use client funds for its own means are too important to miss out on.

However, using a broker with segregated accounts still does not guarantee that firms will not use traders’ funds when in a financial pinch. This was illustrated by the collapse of MF Holdings, which defied CTFC regulations to cover its own losses using client funds.

Head to our list of the best brokers with segregated accounts to get started.

FAQs

Are Online Trading Accounts Safe?

Most trading brokers will never collapse, but choosing a brokerage that keeps client funds separate from its own capital gives investors better protection from the effects of significant market events and mass withdrawals.

How Can I Spot A Segregated Trading Account?

Most brokers will let investors know that they hold client funds in segregated bank accounts in the “About” section, “Regulation” page or “Safety of Funds” section on their websites. Alternatively, we have reviewed and ranked the top trading brokers with segregated accounts.

Can Unregistered Brokers Still Use Segregated Accounts?

Some unregulated brokers will still claim to segregate client funds from their own. However, this can be difficult to verify without regular audits or oversight from a reputable regulator.

Are Online Trading Accounts Insured?

Some brokers with segregated accounts also insure their clients’ funds as part of a fund protection scheme or a separate insurance policy. These firms offer greater protection than trading brokers with segregated accounts only.

Can I Open A Segregated Trust Account?

Many brokers offer strong protection measures to protect client funds, whether in the form of a segregated trust, asset or individual account. Many will use segregated accounts and some will provide additional insurance.