Futures Account Insurance Protection

Discussion in 'Index Futures' started by T-Bone Trader, Sep 8, 2008.

  1. Is there anything similar for my futures account that will insure my deposit --- like there is for regular securities such as the SIPC?

    Or is this really not a major issue with futures firms?

    Sorry if this is a very basic question -- I sincerely don't know much about the structure of these firms......THX!
  2. Jachyra


    Unlike securities accounts which enjoy SIPC protection for the first $100k (and typically private insurance for amounts above and beyond that), there is no account protection for futures accounts.

    Interactive Brokers simulates futures account protection to the extent that they do a daily sweep of excess funds from your futures account to your securities account so that any funds that are not being used as margin for futures transactions do enjoy the benefit of SIPC and private insurance account protection.

    The only other way to simulate some sort of futures account protection would be to use all of your excess cash to purchase U.S. T-Bills, which most FCM's will let you use 90% of as collateral for margin. However, a lot of FCM's will only do this for accounts that have at least $100k.

    Its my understanding that most major exchanges have rules in their clearing member agreements stating that in the event that an FCM becomes insolvent, that every other exchange clearing member is obligated to step up to the plate to help ensure that all customers are "made whole" and according to the NFA, there has never been a single customer that has lost any money due to the insolvency of an FCM (although they may have been inconvenienced for a period of time while waiting to get their funds returned to them).
    CannonTrading_Ilan likes this.

  3. Jachyra : What is your source of this info ? Could you pls. post a link from NFA website where it states that ? I looked around but didn't find that fact.
    thank you

  4. Lack of proper insurance availability is another reason why I trade low and distribute often, meaning that I do not compound up to the sky, and really could not do so anyway with my favorite investment vehicle. Unending compounding is a fantasy and nothing more. The account size always has a limit subject to liquidity, volume, etc. My system and money management is balanced to maximize profitability and scaleability, while minimizing loss due to greedy people stealing my capital or (more likely) me screwing the pooch on a trade.

    If at some time I perform a royal pooch screw on my account (forget an open position, etc) and empty it (precautions have been taken to assure I never owe my broker anything), all I lose is the small amount of capital I use daily to work my systems, between X, the minimum I trade with, and Y, the maximum, at which point I cut profits in half to take distribution. If IB or my broker leaves the country with my money, it's only about 1% of my annual earnings, and it's not worth crying over. Put that amount back in with another broker and keep trading.

    A successful trader is ever-mindful of circumstances that threaten his ability to continue being a successful trader.
  5. Jachyra


    Actually, I don't have a recent source, so I guess I should have phrased it differently. My statements were based off of a phone inquiry I made to the NFA back around 2001. I was trying to find out if they maintained any statistics regarding aggregate amounts of customer funds lost due to firm insolvency, and was told (over the phone) essentially what I stated in my first post.

    It would be interesting to see if any of the registered representatives that are sponsors and/or active on these forums can add their 2 cents.
  6. The NFA is not telling the whole story. The major past problem in the futures industry has been the failure of clearing firms. Customers eventually got their money back, but in the meantime their accounts were frozen. A frozen account not only means no access to your cash, but also no ability to close out open positions or have any input into when the exchanges and/or clearing houses close out your open postions.

    The Volume Investors clearing firm failure in 1985 was a major mess and embarrassment for the COMEX. The firm failed in March, 1985 and here is a news story that appeared on September 12, 1985.

    "The Commodity Exchange said a Federal District Court had approved an agreement that would lead to the full restoration of funds owed to customers of the Volume Investors Corporation, a former Comex member.

    Volume Investors was placed in receivership in March because of losses sustained during volatile gold market activity. The agreement calls for the Volume Investors' principals, Charles E. Federbush and Owen J. Morrissey, to deposit $4.1 million with the firm's court-appointed receiver.

    These funds, together with the $10.4 million already held at the firm, would be used to meet the $13.7 million owed by the company to about 100 nondefaulting customers."

    So 6 months later 100 customers were still waiting for their money and most of those 100 customers were exchange members.
  7. I have heard that from several sources.

    Also, use 2+ unrelated Futures Brokers, using different FCMs/clearing firms. At least prevents all your money from being frozen in case 1 goes under.