Segregated funds and what happens if the broker fails

[Shadow Trader]

Client money is supposed to be kept apart from the broker's own funds. That's segregation, and it's a common requirement. It matters most on the day a broker has a problem.

In an insolvency, segregated funds can be returned to clients, though the process can take months and isn't guaranteed to be complete. Where segregation isn't required or enforced, client funds may be treated as assets of the firm.

The details vary by jurisdiction. Some regions offer compensation schemes covering a limited amount per client. Others offer none. Offshore brokers often have no such scheme.

The January 2015 Swiss franc event showed that even large, established brokers can fail overnight. Some clients recovered their funds, others didn't.

For scalpers, there's a practical angle. Funds at a broker are working capital, and the amount at risk can be limited by depositing only what's needed and withdrawing profits regularly.

Reading the sections on client money, the custodian banks, and the compensation scheme is a modest effort with a potentially large payoff.

How much money sits at the broker beyond what the strategy needs, and what's the plan if the firm failed?