Segregated client account

Family VIII · Regulation

Not to be confused with forex account, client money protection.

Segregated client account is a regulatory arrangement in which a firm deposits customer money in an account that is legally separate from the firm's own operating funds. The account is typically held at a bank or custodian and is designated as belonging to clients, not to the firm. Segregation is intended to prevent client money from being used for the firm's own expenses or being claimed by its general creditors.^[1]

How segregation works

When a client deposits funds, the firm must place them into one or more segregated accounts rather than into its own trading or operating accounts. The firm may hold the money as trustee or under a statutory trust, depending on the jurisdiction. Client money is often pooled in a single account, but the firm's internal records must show each client's individual entitlement.

Segregation does not eliminate risk. If the bank holding the account fails, or if the firm fails to reconcile properly, client money can still be at risk. Rules on what counts as client money, how often reconciliation must occur, and whether the account must be in the client's name or the firm's name vary by country and regulator.

Worked example

Client money segregation

Client A deposit50,00050,000

Client B deposit30,00030,000

Firm's own funds200,000200,000

Segregated client account balance50,000 + 30,00080,000

The firm's own funds remain in a separate account. If the firm becomes insolvent, the 80,000 in the segregated account is intended to be returned to clients, while the firm's own funds are available to its creditors.

Regulatory variation

Requirements differ across jurisdictions. Some regulators require daily reconciliation of client money; others require it less frequently. Some permit the firm to hold client money in its own name at a bank, while others require a trust or a separate legal entity. The level of protection also depends on whether the account is covered by a deposit guarantee scheme, which varies by country.

Often confused with

forex account: A forex account is the trading account through which a client places currency trades, while a segregated client account is the bank account where the client's money is held; the visible sign is that the forex account shows positions and margin, whereas the segregated account shows only cash balances.
client money protection: Client money protection is the broader set of rules and safeguards for handling customer funds, while a segregated client account is one specific mechanism used to hold those funds; the visible sign is that client money protection appears in rulebooks and policies, whereas a segregated client account appears as a bank account statement.

References

↑ Financial Conduct Authority, permanent rules restricting the sale of contracts for difference and CFD-like options to retail clients, in force since 2019. UK retail clients. The FCA extended the restrictions to closely similar products.

Family: VIII · Regulation · Index A–Z