What exactly are customer-segregated funds in relation to futures trading accounts?
Until the autumn of 2011, more specifically the collapse of MF Global, few outside of the futures industry were aware of the term “customer-segregated funds.” The failure of PFG to uphold the sanctity of customer-segregated funds in the summer of 2012 catapulted the phrase into daily usage in national media outlets, and maybe even the homes of many Americans.
Customer-segregated funds are exactly what the name implies; they are monetary deposits made by clients that are segregated from the assets of the brokerage firm. When a client opens a trading account with a futures commission merchant (FCM), which is a term for a brokerage firm registered with the Commodities Futures Trading Commission (CFTC), he is writing a check payable to the FCM for deposit in a bank account that holds client funds but not the brokerage firm’s funds. Or if funding by wire, funds are sent directly into an account under the name of the FCM titled “customer-segregated account.”
The CFTC requires brokerage firms (FCMs) to hold customer margin deposits in segregated accounts as a safeguard against a brokerage firm bankruptcy. In theory, if the FCM suffers financial trouble and files for bankruptcy, any client funds on deposit will be unaffected. In fact, in such a case it is common practice for the funds and open positions to simply be transferred to an alternative FCM, leaving the insolvent FCM to deal with its issues.