Spot Forex is only loosely regulated by the CTFC. The NFA has said it clearly, FX money or currencies in a bankruptcy are considered to be broker assets. It already happened with Refco FX customers.
That's what they said about Refco. It was a happy day when I got pennies on the dollar from the Refco settlement.
It is not "they" (the broker) who has the segregated account. It is the client. The bank letter of credit (issued by the Swiss bank of the client) only covers the flow of funds relative to the client's P&L.
When Refco went bankrupt all futures accounts were untouched and did not lose any money. I was one of the fortunate ones who only had a futures account with Refco. However, the Skadden bankruptcy attorneys made an asset grab for everything else and some here can remind you how much they got screwed in that deal. Believe me, if Skadden couldn't touch those futures accounts there clearly is legal validity and standing in the courts. edit: I think we agree. Forex accounts are broker property in bankruptcy regardless if they are "segregated" or not. I think I misunderstood your post. I was speaking only about segregated futures accounts.
If safety is your only concern when trading, get a small prime account. You can have one for as little as 250k (less in some circles I now hear) and trade freely. Most primes are backed by the larger assets of the firm. Or if you can't go that route, open an account at IB. SIPC protection with automatic sweeps of free cash from futures and forex into equity account, thus the SIPC protection. Just a thought.
Before the RefcoFX bankruptcy there was very little attention paid to the security of funds, it was assumed everything was OK. RefocFX was the catalyst that cleaned up a hidden problem in the industry. FXCM and Gain Capital are very safe for your funds.
That's why I specifically said it depends which regulatory authority the broker comes under. For example trading with a UK broker regulated by the FSA means clients are considered secured creditors and receive priority in bankruptcy proceedings. There are other options as well, cstfx mentioned a couple of practical solutions. People need to exercise a bit of common sense and due diligence when chosing a broker and protect themselves against unforseen events like bankruptcy, if they don't then they have only themselves to blame.
By you maybe, not by the majority. Most people like to know in advance what happens to their capital if the broker goes bust, before they write a check!
Here is the correct answer! Refco FX which went under was not regulated or segregated! ALL customer funds trading FUTURES at REFCO were segregated and had absolutely no loss due to REFCO FX bankruptcy! A smart person would trade Currency futures at the CME (IMM) with a large FCM so the funds would be segregated. I wouldn't trust any shady retail FX firm. MOST importantly a large majority of FX brokers (not Commodities brokers) are crooks who lost their series 7 or series 3 futures licenses. Another benefit of currency futures at the CME is you can actually SEE volume! I am not sure how anyone trades retail FX without real volume. p.s. the post that mentioned writing an IB a check for a futures account.. that is illegal! IB's can only accept funds written to an FCM for their customers. There is a ton of B.S. on this site