Trading in a forex broker with Segregated Account is a must for every trader. Why is that so? Discover the reasons and more interesting facts on the account in this article.
Segregated Account is a term that refers to the account separation of customer funds collectively from the forex broker's operational funds to assure the safety and security of forex trading transactions. This facility that the broker provides is considered vital because a Segregated Account can ensure that the commission and other fees related to trading carried out by traders as a customer can work well, and the broker itself does not misuse their client funds.
The Main Function of a Segregated Account
A Segregated Account's primary function is to accommodate the funds from all clients collectively, so they are not mixed with forex broker's operational funds. The funds in a Segregated Account will be used by the broker only to complete individual transactions from the client and not for the interest of the company.
One of the reasons why that separation is essential is because the Segregated Account can ensure the security of the client's funds. This means the client's funds are easier to be identified when the brokerage company loses its right to control, manage, or transfer its assets due to bankruptcy.
The Advantages of Segregated Account
Segregated Accounts can help to keep the integrity of broker activities in the forex market. Traders are now recommended to determine a broker's merit by its Segregated Account offering. This account is regarded as being critical, considering that nowadays, the risks of forex broker scams keep increasing. A Segregated Account in a forex broker can make the management of the client account more accessible and more precise.
Other than that, forex brokers can also manage their archives more effectively by using the Segregated Account. In other words, the role of a Segregated Account is very significant in the development of forex trading because of the guarantee, protection, and legal certainty in trading forex that can also increase the trader's confidence in trading.
The Enforcement of Segregated Account
Due to its importance, the Segregated Account has been regulated by the FX watchdogs in many jurisdictions. The UK's FCA sets a specific rule under its Client Assets Sourcebook (CASS) 5.5 that includes organizational requirements, segregation methodology, records and reconciliation, and acknowledgment of trust.
The FCA's CASS 5.5 about the segregation and the operation of client money accounts stated:
"One purpose of CASS 5.5 is to ensure that, unless otherwise permitted, client money is kept separate from the firm's own money. Segregation, in the event of a firm's failure, is important for the effective operation of the trust that is created to protect client money. The aim is to clarify the difference between client money and general creditors' entitlements in the event of the failure of the firm."
Meanwhile, the CySEC also regulates the companies under its jurisdictions to implement the Segregated Account. Section 18 (2)(j) of the Law from CySEC explains that "a CIF (Cyprus Investment Firm) must, when holding funds belonging to clients, make adequate arrangements to safeguard the clients' rights, and except in the case of credit institutions, prevent the use of client funds for its own account".
As a client, it is essential to check the forex broker's safety that you're using right now by the availability of a Segregated Account. If you trade in a regulated forex broker, it is most likely that your forex broker has provided the Segregated Account. However, if the forex broker is not regulated, the Segregated Account cannot be ascertained.
Common Misconceptions about Segregated Account
The separation of client funds from the broker's operational funds accounts is a positive thing. Previously, some brokers put their client's deposit funds into the company's operating accounts, making them susceptible to the company's misuse for its own interest.
However, some people still don't fully comprehend what the Segregated Account actually is. Some of the misconceptions are:
Each trader would have a personal bank account in the broker.
Having a Segregated Account doesn't mean having a separate individual bank account in the broker. A Segregated Account is merely a single account set by the broker to accommodate all of its traders' funds collectively. So if the client's trading account balance is negative, the broker will cover this account deficit from the cumulative funds.
Brokers can't use the funds for margins.
The funds in a Segregated Account can still be used as margins. Unless you get a specific direction from the broker, don't expect a Segregated Account to be ultimately saved and secure. The broker can still use it as margin, both for their trading positions and other clients, even if you already use a Segregated Account.
Funds will be completely secure if the company is out of business.
Another essential fact to keep in mind is that Segregated Account cannot guarantee the safety of trading funds if the broker goes through bankruptcy. If a broker goes bankrupt and has more debt than what they can cover, client funds in the Segregated Account can be used to cover those debts. However, matters related to the client's rights when the broker goes bankrupt can vary depends on the rules of the broker's regulator.
In conclusion, Segregated Account is a mandatory feature for every broker. But that doesn't mean you can expect full protection from Segregated Account. To get better protection from unexpected risks, you need to pay attention to the key elements of choosing the best forex broker. Also, this list may help you to find the best forex brokers with segregated account available for clients.