Segregated Funds: How Client Money Is Protected (or Not)
Macro Glossary, Broker and Prop
By Ken Chigbo, macro trader and founder of KenMacro, 18+ years in markets.
Updated 2026-05-20
The desk’s answer
Segregated funds is the rule that client deposits be held in bank accounts legally separate from the broker’s own operating capital. The protection: if the broker becomes insolvent, client funds in segregated accounts are not part of the broker’s bankruptcy estate and cannot be seized by the broker’s creditors. The protection only works if (a) the broker actually segregates as required, (b) the regulator enforces the rule, and (c) reconciliation procedures match the segregated balance to client positions daily. Tier-1 regulators (FCA, ASIC, NFA, CFTC) enforce this; offshore regulators usually do not.
Defined term, Segregated funds
Segregated funds is the regulatory requirement that client deposits be held in bank accounts that are legally separate from the broker’s own operating capital, with daily reconciliation between client positions and the segregated balance. It is the first line of client-money protection in broker insolvency, preventing client funds from being used to pay the broker’s creditors.
How segregation works mechanically
Tier-1 regulators require client deposits to be paid into segregated bank accounts at approved Tier-1 banks. The accounts are titled in a way that legally separates them from the broker’s own operating accounts, typically as ‘Client Money Account – in trust for clients of [broker name]’. The broker performs daily reconciliation: the segregated balance must equal or exceed the sum of all client positions plus client equity. Any shortfall must be made up immediately from the broker’s own capital, and the regulator must be notified. Periodic audits by the regulator verify segregation is operating correctly.
What segregation protects against and what it does not
Segregation protects against broker insolvency: if the broker fails, segregated client funds are returned to clients before any of the broker’s other creditors are paid. It does NOT protect against (a) broker fraud where the segregation procedures themselves were not followed (Refco, MF Global in 2011, FTX in 2022 were variants of this), (b) bank failure of the institution holding the segregated account, (c) market losses on open client positions, (d) execution failures that cause client losses while segregation is operating correctly. Segregation is necessary but not sufficient; it works alongside capital adequacy rules and compensation schemes.
How to verify segregation in practice
Three checks. First, look at the broker’s annual financial statements (Tier-1 regulators require these to be public). Segregated funds will appear as a separate line item, ideally with a footnote describing the segregation banks. Second, check the regulator’s enforcement record for recent client-money breaches; FCA, ASIC and CySEC publish enforcement actions. A clean enforcement record over 5+ years is meaningful. Third, in the unlikely event of broker insolvency, the speed at which client funds are returned is the practical test: under FCA-supervised wind-downs, segregated funds are typically returned within 3 to 6 months. Under offshore broker failures, the return is often years or never.
Frequently asked
What does segregated funds mean?
Client deposits are held in bank accounts legally separate from the broker’s own operating capital, with daily reconciliation. The accounts are titled in a way that prevents the broker’s creditors from accessing client funds in insolvency. Tier-1 regulators enforce this strictly; offshore regulators usually do not.
Does segregation protect me from broker fraud?
Only if the segregation procedures were actually followed. Several historical broker failures (Refco, MF Global, FTX) involved fraud that bypassed the segregation rules. Segregation works alongside capital adequacy rules, compensation schemes (FSCS up to 85,000 pounds in the UK, ICF up to 20,000 euros in the EU), and regulator audits to provide layered protection.
Do offshore brokers have segregated funds?
Most claim to, but offshore regulators (SVG, Vanuatu, Seychelles) do not effectively enforce the rule, do not conduct meaningful audits, and have no compensation scheme. The practical result is that offshore client funds are frequently lost in broker failures. The Tier-1 protection model has no offshore equivalent.
What this means at the desk
Segregation works only when the regulator enforces it. Tier-1 enforces; offshore does not.
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Knowing the term is step one. The next question is always which broker actually serves you well. The desk audits eight brokers on regulation by entity, true cost, and honest fit, with the regulatory caveats the comparison sites bury.
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