What a ‘segregated’ client account actually protects you from if a firm fails

Segregating client money from a firm’s own money is meant to keep customer assets out of the pool that general creditors fight over when the firm collapses. It works, but not the same way everywhere, and it is not a guarantee of getting everything back, or getting it back quickly. What segregation actually delivers depends on which country’s insolvency law applies to the failed firm and, in some cases, on whether the account is held individually or pooled with other clients. Three regulated versions of “segregated” In the UK, the Financial Conduct Authority’s client money rules (CASS 5.5) require a firm to hold client money separate from its own money, and state that this segregation supports a trust arrangement intended to make clear the difference between client money and the entitlements of the firm’s general creditors if the firm fails, according to the FCA Handbook, last updated 2 August 2024. In US futures markets, the CFTC requires futures commission merchants to keep all customer funds used to margin or guarantee futures trading apart from the firm’s own funds, in accounts titled for the customers’ benefit, with agreements that stop a bank or clearinghouse from offsetting the firm’s own debts against that account, according to the CFTC’s published guidance on FCM segregation. If the firm becomes insolvent, segregated customer funds get a bankruptcy preference. But the CFTC is explicit that this preference has a limit: if the segregated pool is not large enough to cover what customers are owed, the remaining shortfall is paid out pro rata alongside claims from the firm’s other unsecured creditors, meaning customers are not made whole automatically. For US securities, the SEC’s Customer Protection Rule (Exchange Act Rule 15c3-3) requires a broker-dealer holding customer securities and cash to segregate them from its own proprietary trading activity, according to the SEC’s Small Entity Compliance Guide, dated 14 July 2017. The same guide explains that these rules exist precisely to increase the odds that customer assets survive intact if the firm fails. But the guide also flags the scenario where segregation is not enough on its own: if a broker-dealer misappropriates or converts customer assets, the Securities Investor Protection Corporation can step in with a liquidation proceeding, and SIPC’s payout is capped at $500,000 per customer, of which only $250,000 can be used to cover a cash shortfall, per the same SEC guide. Segregation reduces the chance of that scenario; it does not eliminate the cap that applies once it happens.