Is your money at your forex 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.

I sent the following email excerpt to James Sanders, Compliance Officer
at FXCM and the author of the Wall Street Journal article I cited:

I read your article in WSJ regarding the "segregation" rule and how
Congress nor the CFTC have done anything to apply this rule to FOREX.
My questions are:

1. What if anything can we as retail traders do to put pressure on them?
2. Does FXCM apply the segregation rule to funds deposited by your clients for trading FOREX?

James was nice enough to respond to my email and here is his response:

1. You can write to your local Congressional representatives and the Chairman of the CFTC.
2. FXCM keeps customer funds separate from firm operating funds as a
   matter of practice but this would not provide the funds with any
   special protection from creditors in the event of a Refco-type collapse.

So even though a firm keeps customer funds separate doesn't mean jack.
The creditors will still be entitled to your funds before you are.

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