FDIC guarantees only up to $250K - not enough by a mile for most brokers.
Also, it will take quite some time for FDIC to actually deliver the guaranteed funds - if during that time the broker can not meet its financial obligations, a client can file a bankruptcy claim against the broker at any time.
FDIC will guarantee only as much as $250K per account.
Honestly, when you open an account with Broker X, will Broker X open a Bank Account just for you? Hell No! IT is all deposited in a single FAT ACCOUNT! And if Broker does not even really deposit/place them in segregated account, it would be sitting right in a single account with the Broker's!
Look at FXCM; they claim to have what, $200M of client's fund? when their bank belly up, expect to get $250K out of that 200M.. an instant 1/1000 depreciation of your money!
And in case the Broker itself bellies up, dont expect to get a cent from your "Client Segregated Account".
Always remember, Traders are classified as "Investors". In case of Broker Bankruptcy, Creditors and Government has the 1st hand on those funds! Last are the Investors. When a broker declares bankruptcy, you can kiss your $250K good bye!
IB offers $1 million of cash coverage for client accounts via SIPC and Llyods. I don't know of any other retail FX firm that offers similar insurance coverage. If anyone does, I'd like to hear about it.
As BurgerKing mentioned, client deposits are considered firm assets. Thus in the event of default, senior creditors have recovery rights against client funds. See Refco for more details.
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IB offers $1 million of cash coverage for client accounts via SIPC and Llyods. I don't know of any other retail FX firm that offers similar insurance coverage. If anyone does, I'd like to hear about it.
The SIPC specifically does not cover Forex or Futures transactions. If you are trading forex, you will need to verify that your broker offers private insurance, and to what extent you are covered.
The SIPC does not work the same way as the FDIC, it is harder to qualify for repayment and some other limitations will apply.
You can always purchase insurance separately, however. Even if it's not via your broker. If you are relying on a policy held by the broker, you should probably check out that policy and see how the coverage is handled. You might find it's not what you think.
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As BurgerKing mentioned, client deposits are considered firm assets. Thus in the event of default, senior creditors have recovery rights against client funds. See Refco for more details.
Depositors should be given creditor preference up to the value of their account.
The SIPC specifically does not cover Forex or Futures transactions. If you are trading forex, you will need to verify that your broker offers private insurance, and to what extent you are covered.
The SIPC does not work the same way as the FDIC, it is harder to qualify for repayment and some other limitations will apply.
You can always purchase insurance separately, however. Even if it's not via your broker. If you are relying on a policy held by the broker, you should probably check out that policy and see how the coverage is handled. You might find it's not what you think.
Depositors should be given creditor preference up to the value of their account.
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Well wait a minute. What about having multiple cash currencies in an account at IB? You are sure they are not covered? What if you have to trade EUR to USD to invest in a stock listed on the NYSE? That is essentially a stock trade that necessitates a currency conversion.
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Well wait a minute. What about having multiple cash currencies in an account at IB? You are sure they are not covered? What if you have to trade EUR to USD to invest in a stock listed on the NYSE? That is essentially a stock trade that necessitates a currency conversion.
From the site...
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The cash and securities – such as stocks and bonds – held by a customer at a financially troubled brokerage firm are protected by SIPC. Among the investments that are ineligible for SIPC protection are commodity futures contracts and currency, as well as investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.
Cash holdings, or any securities that you are holding, are covered. But active commodity futures or currency contracts, as well as investment contracts and fixed annuity contracts that are not registered with the SEC are not covered.
The way I read that (which might be wrong, consult w/ an attorney before taking actions based on any advice you get from the internet) is...
Lets say you've got an account w/ a brokerage that offers multiple trading avenues. You can trade currencies and hold those positions, you can trade stocks and hold those positions, etc. Any positions you're holding in currency if the brokerage goes belly-up are effectively lost. Any positions held in stock would not be. Any cash sitting in your account should be covered up to the limits.
Unfortunately this brings up more questions than it really answers. What exactly would be lost? What happens when you're trading on margin (do you lose the full value or just the margin security)? What happens if you're trading intra-day and the trade is both cash and an uncovered transaction during the settlement timeframe?
It gets even more complex when you start reading thru broker agreements.
According to it, securities (or other eligible transactions) may not be eligible if they're held in a margin account (versus a cash account). Couple in the chance that a major market move might also cause a simultaneous margin call... and the securities you'd sell to balance the position might not be there, leaving you holding the entire bag. If true, you should always transfer long term holdings into a cash account.
How that would effect a margin-based forex trade... is a whole different story.
As you can see this SIPC thing gets incredibly complex, very quickly. Add in limits, other insurers, their limits, contract and agreement specifics, etc, it's not entirely clear what you can really count on. Needless to say an "SIPC insured" logo shouldn't blindly lead you to believe you're safe unless you've done your homework.
As for fraud...
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"Insurance" for investment fraud does not exist in the U.S. The Federal Trade Commission, Federal Bureau of Investigation, state securities regulators and other experts have estimated that investment fraud in the U.S. ranges from $10-$40 billion a year. In the case of microcap stock fraud, the toll on investors has been estimated as $1-3 billion annually.
With a reserve of slightly more than $1 billion, SIPC could not keep its doors open for long if its purpose was to compensate all victims in the event of loss due to investment fraud. It is important to understand that SIPC is not the securities world equivalent of FDIC–the Federal Deposit Insurance Corporation. Congress specifically considered creating a Federal Broker-Dealer Insurance Corporation, but lawmakers wisely concluded that such a designation would be both misleading and out of step in the risk-based investment marketplace that is so different from the world of banking
But active commodity futures or currency contracts are not registered with the SEC are not covered.
Here's the tricky part. IB doesn't handle spot FX in the normal currency contract sense, the actual currency is debited/credited to your account. Whether that changes anything in the eyes of the SIPC is questionable however. It's probably wise to err on no coverage of FX unless proven otherwise.
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I don't know. There's enough gray area to drive a bus thru. I did find afew brokers that say in their ToS "forex is not covered by the SIPC" but that could just be because of the way they're handling it.
The wording is "and currency" ... no mention of currency contracts specifically, so it's hard to know. It might mean all cash is covered, but contracts aren't. Or it might mean that only USD cash positions are covered and all else is considered a currency transaction.
So I think its safe to say that if you are a retail forex trader, the funds that you send to your broker are at risk for:
a: failure/bankruptcy of your broker, and,
b: failure of your brokers bank or liquidity provider
Our funds in the US are held in the name of the broker, not in our own names,,, as boston forex said, if you go the UK then you will get segregation of funds, similar to the way your funds are segregated with futures brokers,,,, most firms now are in pretty decent financial shape, but it is still certainly a risk to consider
