futures secured account and bankrupt risk

Discussion in 'Professional Trading' started by Strunz, Feb 9, 2011.

  1. Strunz


    I have an account with MF Global Chicago for both Euro and Dollars.
    In the statement Euro are denoted as "Euro secured" while dollars are "USD segregated"
    I know that "segregated" means that if a broker is bankrupt I wouldn't lose my money.
    Can you explain the "secured" money risks where a broker is bankrupt?
  2. you gotta call your broker and ask direct clear questions

    and seek direct clear answer (no high tech words as excuse to muddle the issue)

    Do I get my money no matter what, bankruptcy, etc

    Is my account insured YES or NO

    Who insures it ?

    How much is it insured for? 10 k 100 k 1 million

    if you sense that broker is evading or doesn't know clear answers.

    RUN FOR THE HILLS, run for your life

    Iron maden Song.
  3. This is the single worse piece of advice I have ever heard. To take a broker's word for anything they say on the phone is absurd.

    Segregation (which both the US and the UK rely on) is not insurance. Few, if any, firms have insurance that will actually pay you "no matter what".

    Familiarize yourself with the highly risky segregation rules here in the US to start and then figure out what other countries use.

    BTW ... few have taken the time to understand even the basics. Even in the US it is incorrect to believe that "your" account balance is segregated. That is not how it works and because that is not how it works your money is at risk if a big customer or customers blows up.

    Billions were lost in 2008 due to improper segregation at Lehman in London. The system is very weak and incredibly misundestood.

  4. Strunz


    Ok , but in 2 words : if a broker is bankrupt I wouldn't lose my "secured funds" ?
  5. I suspect you mean "segregated" not secured. And the reality is that you as an individual client do not have ANY segregated funds. As a class client funds are commingled with other client funds and that pool of money is segregated from the funds of the clearing firm. It is a fiction to believe your $$$ are in a separate account from all other $$$.

    In a few words: There are a number of ways for a client to lose money if his clearing firm goes bankrupt. Segregation is not insurance and it is frequently misrepresented by the industry.

  6. bone

    bone ET Sponsor

    I had a clearing account with Griffin in the 1990's when they went under due to a rogue Bund trader using give-up agreements over the holidays to game the firm's risk officer (who was actually sick in the hospital with early leukemia).

    The US clients with segregated funds like me got all of their money out of it. The European clients and the US and European firm prop traders got completely hosed.

    When I showed up to trade in the morning, I got a notice handed to me by a CBOT representative and fresh account statement that all of my funds had been transfered to Kottke & Associates with a new account - I actually got to trade that same day using blank trading cards on the floor where my clerk just filled in the clearing info by hand in lieu of nice pre-printed cards. Between Eurexchange and LCH and CBOT and CME Clearing Corps all the segregated US customers had been made whole overnight. They make the US clientele with regulated and segregated accounts whole immediately, and then sort things out between themselves later according to established procedures and forensic investigative protocol between them.

    US segregated accounts are secure and are made whole almost immediately by the Clearing Corp. and the clearing members. All others I would say on a case-by-case basis.

    I can say definitively that US Segregated and Regulated accounts "Yes" from personal first-hand experience.
  7. If you slept with a girl with the clap and did not catch it would that convince you that it was not a communicable disease. All you experience proves is that in THAT SINGLE INSTANCE the segregated pool that you were a part of was not impaired.

    Had it been under water you would have taken your proportionate hit (5%, 10% ... 20% or whatever) along with every other member that class. That is how it works. The rules are not vague on this point.

  8. bone

    bone ET Sponsor

    Swan, your STD compulsion aside, please provide a specific example where a regulated US FCM did not return segregated funds to a US citizen.

    § 1.24 Segregated funds; exclusions therefrom.
    Money held in a segregated account by a futures commission merchant shall not include: (a) Money invested in obligations or stocks of any clearing organization or in memberships in or obligations of any contract market; or (b) money held by any clearing organization which it may use for any purpose other than to purchase, margin, guarantee, secure, transfer, adjust, or settle the contracts, trades, or commodity options of the commodity or option customers of such futures commission merchant.

    [46 FR 54519, Nov. 3, 1981]

    Pursuant to the Commodity Exchange Act and Commodity Futures Trading Commission (CFTC) regulations an FCM (FCM), is required to treat all customers' money, securities and other property received to margin, guarantee or secure futures or options trades as customer property. They are also required to account separately for and segregate customer money, securities and property and not to commingle those assets with the FCM’s own operating assets. Customers' segregated assets cannot be used to margin any other person's trades. These segregation requirements apply to futures and options trades on exchanges located in the United States.

    In compliance with segregation requirements an FCM must do the following:

    Customer funds are maintained at banks in clearly identified "segregated funds" accounts separate and apart from any other funds of the FCM..
    Each bank signs a written acknowledgment that (i) the segregated funds are held in the account in accordance with the Commodity Exchange Act and CFTC regulations, and (ii) the bank will not hold, dispose of, or use any of the segregated assets for anyone, including the FCM, other than the FCM’s customers.
    The assets of one customer at an FCM are not used to purchase, margin or settle the trades or positions, or to secure or extend credit, of any other customer.
    An FCM can only invest segregated assets in funds guaranteed by the United States or other allowed instruments. Investments may include U.S. Treasury securities, municipal securities, government sponsored agency securities, certificates of deposit or money market mutual funds.
    Segregated assets are only invested through, or deposited in, customer segregated funds accounts.
    FCM’s keep a "real time" record of customer segregated funds and assets.
    Every business day, the total amount of customer assets required to be segregated and the total amount of assets actually deposited in segregated accounts is calculated as of the close of the previous business day.
  9. Strunz


    This is the question that my friend has sent to his brokers:

    I need you to make me a huge favor. Could you explain in simple words the difference between segregated funds and secured funds? I know that segregated funds must be outside the brokers balance, but what about the secured funds like EUR? And in case of bankruptcy of the broker, will the customer get 100% of the segregated funds? Will he also get the secured funds? If it comes worse to worse which money will he get back for sure or has the biggest probability?

    This is the answer that my friend has received from his broker n°1 :

    Segregated” should mean customer funds held in respect of transactions in US futures contracts and “secured” should mean US customer funds held in respect of non-US futures contracts. (Note – while "name of broker" is not required to maintain non-US customer funds for non-US futures as “secured”, we have chosen to do so).

    Segregated funds and secured funds may not be commingled with the firm’s funds and may not be used to satisfy any firm obligation.

    This is the answer that my friend has received from his broker n°2 :

    Both segregated and secured funds are held separate from an FCMs operating account and should be protected money. In a bankruptcy both secured and segregated funds should be available and rebated to the customer. In the worst cases of fraud, getting your money back could still be a problem but we have never seen this occur in the industry since the regulations were put in place. Segregated funds will also be paid back first followed by secured and then unsecured. At "name of broker" I believe the only unsecured funds we hold for customers are proceeds from deliveries.

    The real difference between secured and segregated funds has to do with the exchange the product is trading on and how it is regulated. If the exchange is in the US the CFTC and NFA has more control and thus those funds hold the highest level of regulation (segregated). For activity on non-US exchanges there is still protection but less so and those funds are then secured. Either way you need to separate the segregated and secured funds from the firm’s operating funds. Segregated and secured must also be separated from each other.

    All that said I should note that none of these rules and regulations are guaranteed and no one insures segregated or secured funds like the FDIC does with bank accounts.

    I hope this helps!