Segregated Accounts

What Segregated Accounts means

Segregation means a broker holds client money in designated bank accounts at a credit institution, kept legally and operationally separate from the firm's own working capital. The accounts are titled to show they hold client money, the bank acknowledges in writing that it has no right of set-off against them for the firm's debts, and the broker reconciles internal records against bank statements on a regular, usually daily, basis. The firm may not use segregated money to pay its own expenses, fund its hedging book or meet its own obligations.

The purpose is insolvency protection. In regimes such as the UK's CASS rules, segregated money is held on statutory trust, meaning it never forms part of the firm's estate. If the firm fails, an administrator pools the client money and distributes it to clients in proportion to their entitlements, ahead of general creditors such as landlords, suppliers and lenders. Segregation also supports day-to-day discipline, since reconciliation breaks are an early warning sign that regulators and auditors specifically look for.

Segregation reduces loss on insolvency but does not eliminate it. Shortfalls arise from fraud, sloppy reconciliation, money in transit, or the failure of the bank holding the pool, and the costs of distributing the pool are deducted from it, so clients often recover less than 100 percent and wait years to receive it. Segregation is also not negative balance protection and not a compensation scheme: it does nothing about trading losses, and any gap between the pooled recovery and the entitlement must be met by a compensation scheme, if one exists.