Segregated funds

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A segregated fund, or segregated account, is an account used by a brokerage firm to keep the customers' assets separate from the firm's. If a brokerage house becomes insolvent, the customers’ funds will be readily recognizable and will not be tied up in litigation for extended periods of time.

This money, securities or property is held in this manner in compliance with Section 4d of the Commodity Exchange Act and U.S. Commodity Futures Trading Commission (CFTC) regulations. It may not be commingled with the money, securities and property of the futures commission merchant (FCM).[1]

Segregated funds entered the spotlight on Oct. 31, 2011 when broker-dealer MF Global filed for Chapter 11 bankruptcy protection, due largely to the fact that some of MF Global's customer accounts that were supposed to be segregated and protected from the rest of the business had suffered what regulators described as "possible deficiencies." As of Nov. 21, 2011, the MF Global shortfall was estimated to be more than $1.2 billion.[2] Eight days later, trustee James W. Giddens filed an expedited motion for the bankruptcy court's approval of a $2.1 billion bulk transfer and distribution to former MF Global customers.[3]

On April 4, 2012, the CFTC filed and settled charges against JPMorgan Chase Bank, N.A. for the misuse and "unlawful handling" of Lehman Brothers, Inc. customer segregated funds. JPMorgan Chase Bank was ordered to pay a $20 million civil monetary penalty and take on additional measures to ensure that segregated funds are protected.[4]

Restoring Customer Confidence Video Series

Customer Segregation: A Clear View
Moving excess customer funds to a clearing house is one way to reduce the amount of capital at risk. Byron Baldwin, SVP, Buyside Relations at Eurex, says his exchange developed segregated account services that can be as wide or granular as needed. Published Nov. 27, 2012.[5]

References

  1. Glossary. NFA.
  2. MF MF Global’s $310 Million Margin Call Exceeded Its Market ValueGlobal Trustee Says Shortfall Could Exceed $1.2 Billion. New York Times.
  3. Statement from the Office of the Trustee for the Liquidation of MF Global Inc.. John Lothian News.
  4. CFTC Orders JPMorgan Chase Bank, N.A. to Pay a $20 Million Civil Monetary Penalty to Settle CFTC Charges of Unlawfully Handling Customer Segregated Funds. CFTC.
  5. Customer Segregation: A Clear View. John Lothian News: Restoring Customer Confidence.