Field Guide to Trading Terms

Broker insolvency

Family VIII · Regulation

Not to be confused with forex broker, broker, asic regulated broker.

Broker insolvency occurs when a brokerage's liabilities exceed its realisable assets, or it cannot pay debts as they fall due. It is a formal legal condition, not merely a period of poor trading results, and it usually leads to administration, liquidation, or a client compensation process. The practical effect on clients depends on how client money is held and on the rules of the broker's regulator and jurisdiction.

How insolvency arises

Insolvency can result from operational losses, fraud, a large client default, or a mismatch between the firm's own funds and its obligations. It is distinct from market losses suffered by clients: a broker can be solvent while many of its clients lose money, and a broker can become insolvent while client trades are profitable.

Regulatory capital rules require firms to hold minimum levels of own funds, but those rules vary by country and by licence. When a firm breaches them and cannot restore capital, the regulator may restrict its business or appoint an administrator.

Client money and compensation

Client money is normally required to be segregated from the firm's own money, which can improve recovery in an insolvency. Segregation rules and the existence of statutory compensation schemes differ by jurisdiction. Some regimes provide per-client compensation up to a cap, while others provide no scheme at all.

Compensation limits, eligibility and claim procedures are set by the relevant regulator or scheme and change over time, so the applicable figures must be checked with the regulator or scheme administrator for the specific firm.

Worked example

CLIENT CLAIM AFTER A BROKER FAILURE
Client equity at failure—60,000
Client money recovered from segregated accounts—45,000
Shortfall60,000 − 45,00015,000
Compensation payable (scheme cap 20,000)min(15,000, 20,000)15,000

The cap shown is illustrative; actual caps, eligibility and claim deadlines vary by scheme and jurisdiction.

Often confused with

forex broker
A forex broker is a firm that executes or facilitates foreign-exchange trades, whereas broker insolvency is the failure state of any brokerage; the visible sign is that one names a business activity and the other names a financial condition.
broker
A broker is the general intermediary that arranges transactions for clients, while broker insolvency is a specific adverse event affecting such a firm; the visible sign is that one is a role and the other is an outcome.
asic regulated broker
An ASIC-regulated broker is a firm authorised under Australian law, whereas broker insolvency can affect a firm under any regulator; the visible sign is that one identifies a licensing jurisdiction and the other identifies a failure status.

See also

Family: VIII · Regulation · Index A–Z