Broker handling client money?

Hi all,

When looking for a broker should you be looking for a broker that secures client money in a segregate bank account or in a trust account ? Which one is safer in the case if the broker goes belly up ?

Are you limited to the amount you receive back depending on which segregated account your broker uses ?

Thanks

Onyx, I would say that all this is usually more talk than anything else. Legally, if the broker goes BK, the customers' money belongs to the customers, whatever account it is on. This is of course, if that money is still there. The broker will usually have access to the funds in the so-called "segregated" or "trust" account, and a bad behaving broker could still take or spend these funds (the reality being that it doesn't change much, except the advertising done with the "your funds are safer because ... blah, blah...")

If really you want a secured solution, funds would REALLY need to be held by a (real) third party and not the broker. Some brokers propose to let you trade with a bank guarantee for example. You don't give any money to the broker, there is only an engagement from your bank (which holds the funds) to pay for the losses should there be any. But even in this case, if the broker asks the bank to pay for losses that does not exist (that would indeed be some kind of fraud) just before going belly up, you could loose money in the process. And unfortunately, some bad companies do some shady things when they are on the verge of collapse and need funds ;(

(Note: Trading on a bank guarantee would only be for bigger accounts, probably at least $100K, and there are some COSTS involved. So it's more expensive than to trust your broker. The best solution is probably to work with a broker you can actually trust)

Things have changed starting last month (April) for ASIC brokers. They need to reconcile the trading account with the client trust account on a weekly basis.
That means you add up to balances of all MT4 accounts and must match with what the broker holds in the bank account. ASIC initially wanted this on a daily basis but Forex being 24/5 makes it difficult to reconcile. So now it is done on a weekly basis. So broker cannot spend your money anyway they like. Trust money cannot be used for Hedging etc which the broker could do before this. Big brokers like CMC and IG lobbied for this since only smaller brokers use client money for hedging. Hence the rule change last month.

So if a broker goes under the balances on trust account should be available for refund to clients since it should match the MT4 balances. Reporting done a weekly basis means any shortfall is detected quickly.

This reporting is stricter than FCA I believe. Reporting that is done once a month or once a year leaves too much room for fraud.

Thanks both really great posts, so when a broker mentions they are regulated by ASIC does that mean they have to comply to the rules and regulations even though they are not based in Australia but are operating in the country ?

I don't disagree with you Reddevil. But the problem is always that when things go well, there is no problem. Once SHTF, it usually escalates quickly. The day a shortfall is detected, it's pretty much too late. Even if everything was fine one week before. And in the case of an event, a more or less big portion of the money can be gone during a single day...
But, is it better ? Yeah, probably.

Onyx: If a broker isn't based in Australia and mentions an ASIC regulation, it will probably only apply to TRADERS from Australia. At least, be very careful of that. Don't fall for a general mention on their front web page that won't apply to you. The rule really being that you have to "read the fine prints" (and we all know most of us usually don't do it, because it's such a pain in the a.. and in any case, we know it's just a compilation of "whatever happens, you the trader are always the one who is wrong and you have no rights whatsoever, we the broker and everything we may do is always OK". The day there is actually a problem, they will tell to you: But you signed and accepted the terms and conditions ! Same with every financial institution ;( )

Thats the thing even with strict reporting in place to limit such an event which it does help still accounts can be drained instantaneously. I guess it's important to go for a broker that is financially stable and manages risk appropriately.

Mevo,
You need to understand how a Trust account works. It is not a normal bank account. A Trust account require a Trustee - someone not related to the broker. The withdrawal from this account is for client or to company only. i.e. you cannot withdraw cash from this account. Also you cannot transfer money to directors account.
Otherwise the Trustee could end up in Jail. Most trustees are companies (professional trustees) and they will insist that procedures are followed.

A brokerage/company could be setup to scam to start with (e.g. Maddoff). But to put up $1 mil to start the brokerage and wait at least 2 years before you have substantial clients is too long to wait.

The second type of fraud is a director who wakes up one morning and decide to withdraw money and retire in Bahamas after running a company for several years. To get substantial money from Trust account to company account to personal account overseas will require a number of internal approval. The other company director will also need to approve this transfer overseas. If the amount is over $10K, Austrac will be alerted and if the money is to a bank in bahamas, Red alert will be all over the place.

That is why ASIC regulation is better than those in countries like Bermuda or Virgin islands etc is not just broker regulations but rule of law governing the whole banking/prudential process in Australia that prevents fraud.

For ASIC , what I look for is the execution, slippage etc - trading conditions since I know that my money is safe. No point having safe money if all your trades are not winning !!

Reddevil, I am perfectly aware of how a trust works. In the case of a forex broker, it will request funds from the trust account when there are losses. If one day, there is a big movement in a pair, and the broker transmits some bogus information of supposed losses that occurred in some customers accounts, the trust will pay to the broker. Once the fraud is discovered, it's too late.

What you're describing is the case in all first world countries. Yet, if some creative broker executive want to do some shady things, they are numerous ways to do it. I'm not saying they will necessarily get way with it, but it doesn't mean you will see your money again. Sometimes it's not even to run with your money, but they use it for something they shouldn't.

In any case, are there many brokers out there proposing a legit solution where your money is held by an independent trust ?

Just to dumb it down for me which is safer a segregated bank account or a trust ?

Onyx, if you are afraid of what the broker may do, probably a trust account as there is a third party involved. You have to check that they are indeed independent from each another and not an elaborate scam with a supposed trustee who is actually a friend. You would first have to check if it's a registered trustee (it's usually a regulated activity), and try to check the reputation of the trustee as you would do for a broker. With a "segregated account", usually all you know is what the broker is claiming. It may be only talk.
Just to note that the trustee could run with the money ... So, you actually have 2 entities you have to trust: The broker and the trust (with the trust solution, you're only really just shifting the problem: instead of having to trust the broker, it's someone else you have to trust. That someone may even be harder to do some due diligence on)

But, which broker actually proposes a trust account ?

So my second question is when the Broker segregates client money into a bank account or a trust account. Since they have segregated client money and the broker becomes insolvent do you get all your initial deposit/profits back or is this determined after certain parties are paid first and only get some of it back after ?

this is something which is is dependant on your broker and their internal process, which u will never know.
in a ideal scenerio the purpose of trust account is for settlement with respective dma LPs. ie; end of day client's that profits get sum debited into the trust pool, those that took losses are credited to respective external LPs.

however, if a broker has a big enough client base, it can act as its own exchange. with no money ever exiting the trust. ie; ecn within their own clients. your loss is my gain and debit/credit is done in house. in which case. you should only be entittled your deposit.
https://www.leaprate.com/forex/broke...nds-shortfall/

And what if your broker acts as a LP, shouldn't somebody lose in the end in order for you to make gains.

There are several models a broker can run on. Some brokers pass-through all trades to LPs. LPs often like that, and the broker may have a better deal by engaging itself to pass ALL trades. Or a broker can internalize, and it can do it more or less. The broker usually doesn't internalize 100%, meaning that when a lot of people are positioned one way on a pair, it will offset its own position with an external LP.

The basic model without taking much risk is to offset the difference: If 40% of its customers are long EUR/USD and 60% short, it will take a 20% short position with an external LP. Advantage compared to passing all trades is that instead of paying swaps and spreads on 100% of the EUR/USD trades, it will only pay on 20% and keep everything for itself on the other 80% (=the 40% of customers hedged by the 40% of other customers in the opposite direction)

That's really the basics. It's a little more complicated as people don't open opposing trades at the exact same time and exact same price.
(Note: Internalizing 100% would be acting like a casino: Betting that the odds will make the house win whatever the outcome. The broker will gain all swaps and all spreads. This has to cover losses if there are [broker's losses being all wins less all losses of the customers]. Knowing that retail traders often loose more than they win, it may be VERY lucrative, but also quite risky because if some traders bet big and win a lot, the broker would loose)

That circles back to the beginning of the discussion. If the funds of the customers are STILL THERE, yes, customers should get their money back.
Your question appears to be a quite simple one, but the whole matter may be kind of complicated.

First, why would a broker become insolvent ? There is the point raised by Bicarus: does the broker pass all trades to a LP or does it internalize (aka "B Book") and risk its own money ? In the first case, there should be far lower chances it goes belly up. Maybe if its expenses are higher than its revenues (pays more salaries, rent for the office, advertising and so on than what it earns), but the broker is supposed to NOT use customer's money for that (all is in the "supposed"). And customer's money should NOT be used for all that or other debts of the broker in case of bankruptcies. So NO, there shouldn't be anyone paid BEFORE the customers WITH the customers' money. In the second case, chances are higher. But can the broker claim funds are "segregated" and everything in this case ? Some do ! (and yes, I agree, probably in some jurisdictions with no or low regulation in this case). They supposedly "segregate" the funds, which remain at risk because of the broker's activity (they aren't really "segregated"in this case, but some broker will still claim it, because they are on a separate account compared to the one used for day to day expenses).

Problem of an "event" I raised at the beginning of the conversation: The link provided by Bicarus. The CHF/SNB event for example. Some customers have bigger losses than they had funds, all the funds are pooled, even if totally "segregated", the customers who lost, lost some money of the customers who didn't ! ;( Add on top of this the LPs (and/or brokers !) that claimed some crazy prices level at which trades have been/should be closed. They pretty much can come with the number they want in such a case, and THEY DID ! Meaning that this increased the amount of losses of some (often more money than they had !), and in the end, customers' money wasn't there anymore (at least not all of it). Segregated, in a trust account, or whatever, doesn't really matter as it was pooled.

With the bank guarantee I mentioned at the beginning, you would probably have been safer. You would still have had the problem of the broker claiming some huge loss because of the price close they wanted to use (if you had a trade), but maybe you could have prevented your bank to pay, and first fight in court, and only pay once it has been judged. Maybe even not (would depend of the fine prints). There were effectively two situations you could have been in in that example: 1. You had let's says no trade at all, and $xxx in your account. Not sure you can get that $xxx back, because it's not there anymore, even if it's not you that lost it. 2. You had trades and your broker claims you took a higher loss than you really have (at least according to you). You can't get your funds, because the brokers says it's not your funds anymore, you supposedly lost them.

Unfortunately, seems that "trust" or "segregated" wouldn't have helped in any of these two cases. In which case will it really help ? That's the question. The shady broker wanting to run with your funds, maybe. Not even sure. And the shady broker spending customers funds for big parties, luxurious offices and other stuff. Same, not even sure. I guess, that's almost pretty much it.

I normally don't do through small forex company, just look for bigger company will do.

what do you mean by broker act as lp? do you mean counterparty? if u read all the broker's pds they are all your counterparty. there are many avenues for brokers to route orders. i shall list a few.

1) i execute a buy on broker's platform > broker accepts my buy and become my counterparty >>> then they sells on interbank = 0 risk for them, broker earns comission

2) i execute a buy on broker's platform > broker links/forward me to counterparty on interbank = probable risk for brokers in event of black swan and either LP goes bust or i get negative balance, broker earns comission acting as gateway

3) i execute a buy on broker's platform > broker accepts my buy and become my counterparty, no money travels out of broker's hands = my gain is their loss, broker earns comission

4) i execute a buy on broker's platform > broker matches me internally to sell side client, no money travels out of broker's hands = my gain is someone elses's loss. broker earns comission

im guessing your qn is refering to #3 & 4. with that i mind, i will direct you to comb thru your broker's pds/execution policy. there will be a sentence that they(brokers) will have to top up the trust account in the event of shortfall and that any excess of funds, ie; interest beared from banks are theirs to keep.

now hold on, isnt this a crime? brokers keep promoting themselves as "segregate account or trust account"

no it is not a crime. i refer you back to the pds. segregate account only means they cannot use the funds for operating cost; rental/salaries/bonuses.

fyi, i have attached a sample of trade receipt of a true ecn. clearly showing that a LP is the counterparty. such receipts can be requested from your broker. if they want to send it to you is another issue.

A forex trader should try to select and work with a broker that has good market reputations, provides flexible trading facilities plus full security of funds with proper regulations. I have tried to select my broker through this process and have been working with a UK based licensed broker CIBfx and it is providing me lower spread, flexible but good leverage, re-quote and slippage free timely and fastest trade executions, competitively lower commission rates with full safety of funds.

I wouldn't go with a broker using such cheap advertising methods
And their "about us" section states "We do not believe in misleading our clients": Maybe they didn't tell you, SandroFlora ? Because there is nothing "UK based" NOR "Licensed" with this "broker"...