Segregated account is an important term in the context of Forex trading in which a broker holds their client funds in segregated (separate) accounts that are different from the broker’s core banking account. Segregated accounts are used to differentiate between the broker’s working capital and its client investments. By holding its customers’ funds in segregated accounts, the broker foregoes its rights to use their clients’ trading capital for any purpose other than to meet the trading or margin requirements. Segregated accounts prevent brokers from indulging in any financial malpractices, which help traders to enjoy complete peace of mind while depositing money with a broker. From a trader’s perspective, it is highly imperative to choose Forex brokers with segregated accounts to ensure that they are protected from broker scams or other issues such as broker insolvency.
The Significance Of Deposits In Margin Trading
Forex trading works on the principles of investing money with a broker that enables a trader to place orders on the market according to the different margin requirements set by the broker. Forex transactions are usually carried out in multiples of standard lots or micro lots, which ultimately depend on the amount of leverage provided by the broker. Market orders are also dependent on the type of broker, as brokers may offer market maker accounts or direct market access accounts according to a trader’s preferences.Eventually, all types of orders are either filled by the broker internally for market maker accounts, while brokers pass on orders to the global liquidity provider for direct market access accounts. Immaterial of the type of broker, brokers should hold a minimum amount of money (also called the margin of trading) in a trader’s account for the trader to be able to open and close positions at the interbank exchange rates. Therefore, the amount of money that a trader deposits into his brokerage account serves as the minimum margin amount required by the broker to facilitate Forex trading. During the initial days of Forex trading, all client funds used to be held in the broker’s account, which helped the broker to facilitate easy transfer of money between the market and its client. However, holding client funds in a company’s account made it susceptible to misuse, which led to a significant number of broker scams and financial irregularities.
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Fraudulent brokers were rampant in their aggressive strategy to earn money from unsuspecting clients by using client money to fund their own operations. Some brokers also followed unethical means such as refusing payments, taking orders against the clients, price manipulation, displaying incorrect price feeds, and inducing platform delays to prevent traders from being successful in their trading ventures.
Why Major Regulatory Authorities Insist On Segregated Accounts
The large-scale broker scams and financial malpractice in the Forex industry has led to several regulatory agencies such as the NFA, the FCA, the CySEC, the ASIC, and other primary regulators from around the world to enforce the concept of segregated accounts on its regulated brokers. Segregated accounts prevent brokers from utilizing clients’ funds for any other purposes, which ensures the safety and security of funds. Regulatory authorities also found that having segregated accounts mostly helped in minimizing the risk to trader against broker issues such as insolvency, mergers, or bankruptcy. It is also easy for regulatory agencies to keep track of the company’s financial transactions by being able to keep an updated record of the funds in segregated accounts. Routine audit reports and financial statements also aim to provide precise information about the broker’s financial dealings, and a regulated broker will always have a transparent and accurate record of its financial history. By keeping a company’s account separate from its clients’ accounts, regulators can virtually guarantee that the broker will be unable to access any of their clients’ money for meeting the company’s operational requirements.
The Perils Of Choosing A Broker That Does Not Offer Segregated Accounts
Most of the non-regulated brokers in the industry don’t offer segregated accounts, as they are not legally bound to do so. Several unregulated brokers lure traders in with the promise of hefty bonuses and reward programs, but in reality, all investments go to a single bank account that is owned by the broker. Therefore, these brokers have the freedom to use the funds in any manner that they desire, and can even withhold payments or use the money to hedge positions against their trader’s position. Therefore, there is a direct conflict of interest between the broker and its client, which prevents the trader from being profitable in their trading ventures. Some brokers are found to use their client funds to match their account balances illegally and are also known to use such funds to open their own trades or transfer the money to different investment ventures. Therefore, in the case of any potential disputes or other legal issues such as bankruptcy or insolvency, traders will be unable to recover their money if it is not held in segregated accounts. One of the major problems of choosing brokers that do not offer segregated accounts is the lack of any protection against the broker’s antics, which can outright deny payments to its traders if they don’t have the sufficient operating capital to meet their trader’s demands.
How To Determine Whether A Broker Uses Segregated Account
Almost a majority of regulated Forex brokers use segregated accounts, as most of the authentic and high-quality regulatory agencies mandate the use of segregated accounts for holding client investments. Mainstream brokers with a good reputation in the industry are highly transparent in their financial dealings, and usually provide details of their banking operations to build trust and confidence among their clients. Regulatory agencies also make it a priority to instruct Forex brokers to open and maintain segregated accounts at tier-1 banks that can provide stability and security of funds. Traders can enjoy the benefits of segregated accounts only if the bank chosen by the broker can hold large volumes of funds without succumbing to market volatility. However, some regulated brokers may want to keep funds in lesser-known banks and may not offer a secure platform for protecting their clients’ trading capital. Therefore, as a trader, you should make it a priority to browse through the different aspects of a broker to prevent any major pitfalls, as even regulated brokers may tend to indulge in fraudulent practices from time to time.