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When broker goes bankrupt

  • #1
  • First Post: Sep 11, 2010 3:37am Sep 11, 2010 3:37am
Hypothetically speaking, when broker goes bankrupt, and let's say that is regulated broker, what happens with client's funds?

Did ever any forex broker bankrupted and what happened with client's money?

Is there a way to find out that a brokerage firm is in financial problems before the crash?
  • #2
  • Sep 11, 2010 4:15am Sep 11, 2010 4:15am
Quoting fx111
Hypothetically speaking, when broker goes bankrupt, and let's say that is regulated broker, what happens with client's funds?

Did ever any forex broker bankrupted and what happened with client's money?

Is there a way to find out that a brokerage firm is in financial problems before the crash?
Presumably, the "regulated" broker would be forced to keep client deposits in an account segregated from company funds so in the event of a bankruptcy, you would at least get your initial capital back. However that is no guarantee so keep to the time old maxim that you should not invest money you cannot afford to lose, not only for the reason that the Forex market is one of the riskiest.
  • #3
  • Sep 11, 2010 8:16am Sep 11, 2010 8:16am
Quoting oakmonster
Presumably, the "regulated" broker would be forced to keep client deposits in an account segregated from company funds so in the event of a bankruptcy, you would at least get your initial capital back. However that is no guarantee so keep to the time old maxim that you should not invest money you cannot afford to lose, not only for the reason that the Forex market is one of the riskiest.
Not in the USA for FX-brokers. Even if the client-cash is parked at a seperate account ("segregated") - which it porbably is, it doesnt matter. Ultimately the court decides who gets what of what is left, if there is anything left, and the clients, being unsecured creditors, are the last to get paid. The first to be paid are the court and attorneys, then eventual fines from the court and NFA/CFTC/SEC, then the secured creditors (if there are any), and lastly the clients.
  • #4
  • Sep 11, 2010 11:21am Sep 11, 2010 11:21am
Yes, Dodd Frank and the CFTC are forcing US traders to trade at US brokers where funds are actually LESS SAFE (for this very reason) than they would be in the UK. Your tax dollars at work.
  • #5
  • Sep 11, 2010 1:40pm Sep 11, 2010 1:40pm
If a US bucket shop broker goes bankrupt, you're screwed. BS brokers are regulated, and many many have +20 million reported with the CFTC/NFA, but that doesn't mean you'll see any of that money if the broker files for bankruptcy.

You're funds are not 'insured' with a BS broker. One of the reasons I'm against CFTC regulating forex is, they're regulating us like Futures but we get none of the benefits and protections of Future traders .... such as insurance. If a BS broker fails, try and be the first in line at their bankruptcy hearing. It's not guaranteed but the trader may recover some (I doubt all) of their equity.

If you trade with Bank brokers (such as CitiFX and Interactive Brokers) you are protected. Bank brokers and their client's funds are protected by either FDIC and/or private insurance which is required if that broker is under banking rules/regs. In a lot of cases, those Bank broker clients are able to trade segregated accounts, which are protected against broker bankruptcy.

If you have to trade with a bucket shop, trade only with those brokers that have $50 million and over registered with NFA. So far those brokers are:

*Oanda = $160 Million
*GFT = $80 Million
*Gain/Forex.com = $100 Million
*FXCM = $70 Million

Now, just because these brokers are well capitalized doesn't mean they can't go bankrupt. A well capitalize broker will help limit the such problems.
  • #6
  • Sep 11, 2010 7:41pm Sep 11, 2010 7:41pm
Remember a big US Broker: REFCO
  • #7
  • Sep 12, 2010 6:24am Sep 12, 2010 6:24am
It makes me nervous when thinking about broker bankruptcy : D
Yea, i was reading about Refco, so there was no news or rumours that they had financial problems so clients could pull back money,it just came out of the sky that they go bankrupt?
And where can be seen for brokers outside usa how much they capitalized?
btw. As i'm thinking to open account at fxpro, i saw on their web page that they have segregate accounts for clients and that they are member of the Investor Compensation Fund so they can compesate clients funds if something like bankruptcy happens ( http://www.fxpro.com/manage-accounts ) , so clients have maximum 20 000 € for compesation. That's what they say, but as i'm not familiar with Cyprus bankruptcy laws i was wondering is this realy true?
  • #8
  • Sep 12, 2010 12:09pm Sep 12, 2010 12:09pm
  •  onu
  • | Joined Feb 2006 | Status: superior senior member | 746 Posts
Quoting someone1
Remember a big US Broker: REFCO
Don't forget the FXLQ case...
  • #9
  • Edited 6:41pm Sep 12, 2010 6:26pm | Edited 6:41pm
Quoting fx111
It makes me nervous when thinking about broker bankruptcy : D
Yea, i was reading about Refco, so there was no news or rumours that they had financial problems so clients could pull back money,it just came out of the sky that they go bankrupt?
I'm not sure about that. http://www.nfa.futures.org/basicnet/...irm&firm=REFCO looks like there might have been many warning signs if you were looking in the right place.

There is a good article on BKs at http://money.howstuffworks.com/perso...bankruptcy.htm IMHO, everyone trading should read up on how a bankruptcy works.
  • #10
  • Dec 14, 2010 11:58am Dec 14, 2010 11:58am
Quoting Jhig
...
If you trade with Bank brokers (such as CitiFX and Interactive Brokers) you are protected.
...
Are you sure the IB is a "bank broker" ?
and
do you mean a "bank broker" is a bank ?
  • #11
  • Dec 14, 2010 9:30pm Dec 14, 2010 9:30pm
It is amazing how many times this topic comes up for discussion ( as compared to Equity trading forums)
Ever wondered why? because even authorities in countries with reputable regulatory regimes like USA/ AUS/ UK really do not seem it fit to protect consumers at the same level as that of Stock traders.

The authorities just stop at making Seg account mandatory and lots of warnings...but no national Insurance fund

On top of that even traders complaint when govt tries to regulate FX! becasue they think that it is impinging on free market! ( in other words to keep the high leverage etc they are happy for lax regulations!)

Any way this issue depends upon which country the broker is based

After a reecnt collapse of an Australian broker I started investigating the situation unfortunately no matter where you go client funds safety remains an issue READ the fine print

USA: Many have already explained Cap requirements may give you some protection..
I think this thing about Bank protection is a myth "If you trade with Bank brokers (such as CitiFX and Interactive Brokers) you are protected. Bank brokers and their client's funds are protected by either FDIC
Citi FX offers this additional service but your funds I guess are still at risk before they are transferred to FDIC and what if there is fraud Broker arm !

UK: FSA and the FSCS insurance.. I tried in vain to ask a simple question to Insurance authority " Does the insurance cover clients of FX brokers in UK"
Never got a straight forward Yes or NO
You can try if you like by emailing [email protected]

Australia: Just to answer your original question YES a FX broker did go belly up on 22nd JUne 2010 with a 47 Million missing from Client Seg account, mainly due to fraud + House trading Sonray...
Australian money rules makes it mandatory to have seg accounts BUT these are still co mingled not individual and ASIC has done hardly much to improve the situation... ok one broker boasts about insurance but it is really difficult to see how one can insure against own fraud!

What is worst is Australia still allows High Leverage and hedging so more and more overseas clients are going to come in to Australia ( thanks to Oprah we will be on the world stage soon as a "Friendly Country"

Fine print : Example FXCM Australia

http://www.forextrading.com.au/docs_...t-parts1_3.pdf

Page 13

It all sucks

Keep the door open for scoundrels and they will come and get you no doubt

SO be very very careful .
  • #12
  • Dec 15, 2010 5:14am Dec 15, 2010 5:14am
Quoting moksha
It is amazing how many times this topic comes up for discussion ( as compared to Equity trading forums)
Ever wondered why? because even authorities in countries with reputable regulatory regimes like USA/ AUS/ UK really do not seem it fit to protect consumers at the same level as that of Stock traders.

The authorities just stop at making Seg account mandatory and lots of warnings...but no national Insurance fund

On top of that even traders complaint when govt tries to regulate FX! becasue they think that it is impinging on...

Alright, spot forex has no protection of funds in case of bankruptcy, but how can client find out that broker has financial problems to take out money before the crash?
Maybe seeing that net capital becomes smaller and smaller from month to month or what?
I was reading about Refco in wikipedia, and it says :"Refco has not enjoyed a clean reputation with regulators. The Commodity Futures Trading Commission and the National Futures Association took action against Refco and its units more than 100 times since the firm's founding. According to the Wall Street Journal, it was "among the most cited brokers in the business, according to data provided by the NFA." http://en.wikipedia.org/wiki/Refco ---- So i guess there were signs.

What is the name of that Australian broker?
  • #13
  • Dec 15, 2010 6:39am Dec 15, 2010 6:39am
Quoting fx111
Hypothetically speaking, when broker goes bankrupt, and let's say that is regulated broker, what happens with client's funds?

Did ever any forex broker bankrupted and what happened with client's money?
I think a forex trader trades certain % of money deposited with the broker. Example 3% or 5% of the capital. So I think only the trading money is at risk and the remaining money is safe in the account. Please confirm this.
  • #14
  • Dec 15, 2010 8:05am Dec 15, 2010 8:05am
Not in the case of bankruptcy, everything deposited is unsecure.
Read about Refco, when they announced bankruptcy, they freezed client's money and noone could withdraw it.
But i think most important thing is act immediately.
Bad news about Refco fraud went out on october 10, 2005, but they declared bankruptcy 17/18 october 2005 and then accounts was frozen, so from hearing news to frozen accounts went 7 days, in that 7 days people could withdraw money.
  • #15
  • Dec 15, 2010 11:00am Dec 15, 2010 11:00am
I'm definitely not a finance guy but doesn't a public company have a higher chance of going bankrupt due to speculation on its stock price to $0 ??


http://www.marketwatch.com/story/gai...ipo-2010-12-15
  • #16
  • Dec 15, 2010 8:20pm Dec 15, 2010 8:20pm
FX 111
You asked "What is the name of that Australian broker?"
DO you mean the one that gone belly up!
It was called Sonray Capital Markets ( WHite lable of Saxo)
By the way I wonder why SAXO does not offer retail in AUstralia although they have an AFSL

Sonray 76 MIl in Seg account... 47 million missing1

We the Creditors have spent almost 2 million on administrators

ASIC our regulator irrespective of this has done xxx all to protect consumers.. toothless watchdog

You can find out about Sonray here
http://www.ferrierhodgson.com/en/Cur...rs/Sonray.aspx
  • #17
  • Dec 16, 2010 4:32am Dec 16, 2010 4:32am
Quoting moksha
It was called Sonray Capital Markets ( WHite lable of Saxo)
Were there any signs, any bad news about them before they collapsed and froze client's money?
I read that they suffered a loss 2009. - "Sonray’s latest accounts did display signs of financial stress. The company suffered a $1.5m loss for the year ended 2009, as expenses of $10.5m outweighed $8.3m in revenue, up from a $442,000 loss for the previous year as costs rose at about twice the rate of revenue."
http://www.contracts-for-difference....dministration/
  • #18
  • Dec 16, 2010 6:58am Dec 16, 2010 6:58am
Quoting fx111
Were there any signs, any bad news about them before they collapsed and froze client's money?
I read that they suffered a loss 2009. - "Sonray’s latest accounts did display signs of financial stress. The company suffered a $1.5m loss for the year ended 2009, as expenses of $10.5m outweighed $8.3m in revenue, up from a $442,000 loss for the previous year as costs rose at about twice the rate of revenue."
http://www.contracts-for-difference....dministration/
problem was, they ran a dealing desk offering cfds on stocks with selective hedging. in a financial crisis when stocks are going down up to 40% over night, you can imagine the losses that are being incurred! this is the reason why CFDs are evil and dealing desks are a inferior model to 100% hedged STP and ECN models that FX brokers use. Based off the figures you posted Sonray was the titanic just waiting for the iceberg (GFC)!

Cheers,
  • #19
  • Dec 16, 2010 10:32am Dec 16, 2010 10:32am
Technically, when the broker goes bankrupt, you go 'bankrupt' too. Read the contract when you open an account at an fx broker. Even it it's a registered one at NFA, CFTC, FSA.

But it seems that this apply mostly to the so called bucket shop/market makers. For second/prime brokers, it'a another field.
  • #20
  • Dec 16, 2010 2:31pm Dec 16, 2010 2:31pm
Quoting Progressive
But it seems that this apply mostly to the so called bucket shop/market makers. For second/prime brokers, it'a another field.
Refco was a prime broker too, and claimed that money of their clients is in segregate accounts.
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