Security of Trader's Funds

One of my concerns is the security of my trading account. Even though the funds are held in a respected bank, they are in-effect under the control and ownership of the broker. This means that if the broker goes belly-up, I become nothing more than an un-secured creditor. Is that right? Is there any way of reducing this risk?

I share your concern.

I'm curious why no one has answered this. Surely it's an issue?

Squid

Yes, you are accurate. That's why you need to find a reputable broker. Some brokers protect client funds using a fidelity bond, which is a good thing to look for in a broker. If you notice, there are some traders on these forums who were caught up in the Refco collapse and have had difficulty getting their account funds back from the company. This is a worst case scenario. It's yet another risk associated with trading the lucrative Forex market.

Hey guy! Don't chu worry about that. So what if this is an unregulated market........ ??? We are very fair and trustworthy broker..... What do chu mean our pip spreads aren't even close to what we advertise???....... Yes sir, the mini accounts come with 400:1 leverage so you can become a millionaire ez, no worries.... just 10 pips a day..... that's ez. That is why I answer phone here for $6.00 hourly, because it's so easy.


Sorry to ramble, do your homework and don't keep more in your account than you need to trade with... good luck.

I spoke to FxSol about this and they confirmed what I've said. Basically, your trading funds are at risk if a broker goes to the wall. I guess you can only choose a reputable broker and when you get enough money in your account, place what you don't need for trading in another account.

Everyone rates FxSol pretty highly, but then maybe a lot of people rated Refco highly and look what happened.

My stock broker holds my trading funds in a trust account and only moves funds into a trading account when they're needed for a trade. Maybe this approach should be adopted for the fx market.

Another thing is that the brokers are free to use your trading capital for other investment/trading purposes, as the banks do. So there are a whole lot of risks, up to and including the bank itself. Nothing is ever totally secure.

thank you for posting your broker, i want to open the account with them, but i live in us and have no clue about the swiss financial system. how can i check if a swiss broker is a good one?

I couldn't agree more with regard to the above last sentence.

Basically, we can do three things:-
1) Try to be a successful trader (ok....ok, I'm still trying!!!). That way, you'll be trading with other people's money after a period of time. Your original capital would be safely in your pocket.
2) Monitor & keep just enough to cover your daily margin.
3) Keep your fingers crossed. Just assume that there's nothing much you can do about those funds in your trading account. If something really happened & you managed to get your money back, consider that a bonus.

It's a bit like spearfishing in shark infested water.....get as much as you can while the going is still good.

If your broker is authorised by FSA (in UK) and you're clasified as "private investor" then your funds are kind-of-insured for upto 40k pounds. That's because of FSCS (www.fscs.org.uk)

I hope I'll never need it, though.

This is very misleading because a fidelity bond doesn't protect funds in the event of a bankruptcy. It protects against emplyee theft of funds and fraudulent acts by individuals.

It depends on the specific terms of the fidelity bond. I've seen some which list financial insolvency. But, you are correct that it isn't necessarily the case and, in my experience, is rarely the case.

Hi Guys ~

Thought maybe you might find this helpful.....

1. What does the Fidelity Bond 14 Coverage do?
   1. This bond specifically relates to forex products only.
   2. The purpose of the bond is to provide customer asset (account) protection only in cases of any loss from fraudulent acts [i.e. Forgery, embezzlement, theft] committed by employees of the firm.

1. Are customers’ funds protected by the bond if the firm were to go bankrupt?
   1. No. The bond does not protect the customers against bankruptcy. This is commonly confused by SIPC or FDIC protection (please refer below for full explanation on the coverage).

1. Are we required to have customer asset protection?
   1. No, unlike the securities industry, there is no regulatory requirement for the firm to have coverage for its customers, it is only a supplemental item that forex firms offer to its customers since fidelity bonds similar to that of SIPC are not offered for the forex industry.

1. What is SIPC (Securities Investor Protection Corporation)?
   1. SIPC coverage specifically relates to securities products only.
   2. SIPC is the first line of defense in the event a brokerage firm fails owing customers’ cash and securities due to bankruptcy or other financial difficulties. Basically, SIPC helps individuals whose money, stocks and other securities are stolen by a broker or put at risk when a brokerage fails for other reasons.
   3. Customers can find out more information about SIPC at www.sipc.org .

1. What is FDIC (Federal Deposit Insurance Corporation)?
   1. FDIC coverage specifically relates to banking institutions and is not available for any of the investments products offered by the firm(s).
   2. FDIC helps the bank customer In the event of a bank failure. Securities, mutual funds, and similar types of investments are not covered by FDIC.
   3. Customers can find out more information at www.fdic.gov
      

Other things to look for would be comments like this below posted on our website:

"From an accounting and operating standpoint, customer’s non-margined Forex funds and MB Trading Futures, Inc.’s (“MBTF”) operating funds are separately maintained. MBTF maintains a separate account at Wells Fargo Bank, a federally insured bank, for the exclusive benefit of customers in which Forex funds that are not used to satisfy margin or trading requirements will be deposited for safekeeping. Forex funds that are held in the separate account will not be used in the day-to-day operations of MBTF. While Forex funds are separated from MBTF’s operating funds, they are not segregated as defined under CFTC regulations."

I hope this helps

Justin:
I know some brokers accept T-Bills as collateral for margin instead of cash. Is that possible at EFX, and are those T-Bills safer when it coms to broker-bancrupcies?

Shrike,

This is not something we do at EFX....actually I had never even heard of that.

Its possible at MBT for futures trading, Interactive Brokers do it too (only for big accounts tho).

Choosing a reputable broker might not work.

When I started in forex, I tried to be careful.

I asked around about who was the safest broker.

I was told that Refco was the largest forex broker in the world. The spreads were high, but that was the price for the safety they provided.

Moral of the story- Do not trust your money with any US forex broker. Deposit only what you can afford to lose and don't be surprised if you lose it.

it would be so easy for u.s. regulations to treat forex account like they treat stock and futures account and all our money will be safe

Do Switzerland brokers offer any better protection than US brokers if any at all?