Is your money at your broker safe?

The quick and dirty answer to this is no.  Just ask retail traders whose monies were frozen when Refco went down.

I was reading an article in the Wall Street Journal today that brings up the fact that we as retail traders need more protection.  The CFTC or Commodity and Futures Trading Commission have a "segregation" rule which means that brokers must keep client funds separate from the firm's operating funds.  This rule only applies to U.S. traders who deposit funds for trading on-exchange futures or options on futures.  If you trade over-the-counter derivatives or off-exchange products such as FOREX, there is no rule against brokers mixing your funds in with the firms operating funds.  This is what Refco was doing.  

So the bottom line is that our money is absolutely not safe and there is nothing that says that a broker firm cannot use your deposit money to operate their business.  The unfortunate thing about all of this is that neither Congress or the CFTC have taken any steps to expand the segregation rule to FOREX traders.   

This is very disturbing and probably reason enough to only deposit what is absolutely necessary to trade.  In addition, if at any time you can withdraw money or profit, for this reason alone, you should do it.  

This article was written by FXCM's chief compliance officer so I would be very interested in knowing if FXCM follows their own rules and applies segregation to their client's funds.  I'll try to find out. 

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