Recent events at MF Global has resulted in financial chat rooms and forums being filled with questions about the safety of client funds at retail trading houses and what it means to have money held in segregated or non-segregated accounts.
Before answering this question it is important to firstly understand how clients are categorised at these firms because your categorisation will determine how your funds are treated. The vast majority of clients who spread bet or trade CFD’s will be classified as retail traders and as a result will have all deposits and open profits held in a segregated account, away from any other company money. This means that the firm you are using is unable to use any of your funds for their normal business activity, including, but not exclusively, the placing of your money at their hedging broker to cover margin for their positions in the market.
For example, a retail client of a spread betting company who chooses to place a trade of £100 per penny move of BP would be required to place a deposit of around 5% of the contract value onto their account which would be held as initial margin. If your spread betting company wanted to hedge this bet, they too would be required to place 5% of the contract value with their broker but they would not be able to use your deposit to fund their trade but would have to use their own company funds instead.
Your deposit, and any open profit on your bet or trade must, under FSA rules, be held in a segregated bank account and regulated companies are required to recalculate the amount of monies required to be held in these accounts on a daily basis. Failure to segregate these funds is likely to result in a very large fine and potential further sanctions by the regulator.
So why would your funds and open profit be held in a non-segregated account? The answer is when you have been deemed by the company you trade with that you have sufficient trading experience (this means you have traded, in significant size, on the relevant markets in a frequency of 10 times per quarter over the last 4 quarters) , have sufficient liquid funds in excess of €500,000 or have worked in the financial sector for at least 1 year gaining relevant experience and are therefore able to be categorised as a professional client. As a professional client you may receive better spreads or commission charges than retail customers, receive interest on the monies you hold on account or be eligible for discounted or free trading software but the downside is that your funds will be considered by the company as part of their working capital and so may be used by the firm to fund their own positions in the market. If the worst was to happen and the company filed for bankruptcy or went into liquidation your funds would not be protected and you would join with other creditors of the business in the wait for the return of your funds.
There are many rumours in the market at the moment about what went wrong at MF Global and if client funds were mixed in with the firm’s money but until the regulator has investigated they are pure speculation. What remains clear is that the rules governing client money in the UK are very strict and companies are constantly monitored by the FSA to ensure that they stick to them.
This is clearly an extremely important consideration when deciding which company to use for your trading and so it is worthwhile speaking to your preferred broker or provider to gain a better understanding of their segregation process, which banks they use when they place your money on account and to feel comfortable with the way they conduct their overall business. Don’t be afraid to ask them the difficult questions, it’s your money after all.
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