What is a Segregated Account, and How Does it Work?
A segregated account is a must-know concept if you are going to start forex trading or planning to open a forex broker account. Knowing this term allows you to easily classify a broker and decide if you want to invest with that specific broker. However, according to the recent regulatory update worldwide, having a segregated account is a must-have feature offered by all the regulated brokers.
However, it ensures a broker’s reliability, but it will never ensure the hundred percent protection of your deposited capital as you will trade eventually. The segregated account will provide nontrading security.
Throughout, we will go through all the segregated account types that best forex broker offer so that you can pick one for you.
CySEC, FCA, FSB, DFSA, SCB
FCA, ASIC, CySEC, SCB, DFSA, BaFin and CMA
What is a Segregated Account?
It is an account to store your capital separately from the brokers or company’s working capital. The segregated funds contain the clients’ funds only, so the company’s money won’t get mixed. As a result, clients can see their funds and understand by looking at the statement. In addition to that, brokers can gain trust by offering segregated accounts to their clients.
The concept of this account is used in forex trading as sometimes traders may not keep tack their fund in the volatile forex market. So, the segregation in the accounts keeps the transparency between the trader and the broker. Besides, clients can see ins and out of their funds.
How does the System Work?
When a trader deposits a fund in their trading account, brokers send that fund in a separate account instead of storing it in the company’s central account. Next, when a trader places an order, it takes money from the segregated account. That how the separate account completes the transaction, which totally different than the company’s transaction.
Furthermore, the trader’s fund stays safe, which can be identified if needed.
Pros of Segregated Account
When retail forex trading started, both client’s fund and the company’s fund remained in the same account, which was complicated to separate if any problem arises. So, the combined funding method was not quick enough to solve any problems. To resolve this complicated situation, the segregated account was introduced by different regulatory authorities. However, the separate account method has a wide range of benefits, such as as-.
- Brokers can act transparently. It is because the money remains in a separate account, while traders can control it from their brokerage account.
- It offers chargeback features for the traders. However, it only works if there is any proven fraudulent activity.
- Automatic inbound transfer is available via segregated funds. However, the outbound transfer is also available.
- Traders won total control of their funds and took their decisions.
- Since funds are accessible by the clients; they can withdraw whenever they want.
- Funds remaining on the segregated account don’t expose other traders, which saves you from any risk.
However, the best forex broker always supports segregated accounting methods. So, clients can feel safe and create their strategy by providing enough time on it as finds are not going anywhere.
Cons of Segregated Account
All the pros we have mentioned earlier may seem appealing to anyone. And, it is common that, when something looks attractive, it tends to have some negative sides. However, the segregated account is an exception in this case as it doesn’t have any cons!
Misconception on Segregated Account
No wonder keeping the funds in a separate account is a positive vibe for a trader. A combined account for the traders and broker may give the opportunity to misuse the trader fund if the broker faces any problem. But there is some misconception (mentioned below) that is widely believed by many traders.
A personal segregated account is available for all
From the name, some traders can guess that they are getting a separate funding account by default. But the segregated account is not what they understand. It is a single account to keep all the traders’ fund that is different from the company account.
Brokers have no right to use the segregated fund as margins
Well, the funds remain separate, which means the trader’s fund is always safe and stays there if you don’t make any transaction. But this is not always true as a broker can play a trick and use the client’s fund permitted by them. So, the broker always provides this info while you signed up. If the broker doesn’t want to use the client’s fund in the future, they will specify it somewhere. However, if they want to use the trader’s fund, they won’t specify it. Reading all the documents will help you out.
In the case of bankruptcy, you are safe
The segregated account may not always help you out if the brokerage or the company files bankruptcy. So, if a broker goes out of business, it may use a client’s fund to pay the debt and keep the business going. Still, everything depends on the policy created by the brokers. If the broker offers negative balance protection, it should be safe even they go bankrupt. On the other hand, without a negative balance, it is not safe.
So, you may wonder, is it safe?
It is safe, as you will trade with a regulated broker, who offer negative balance protection to all the traders.
Is Segregated Account Helpful?
It depends¸ as rules varied on forex trading platforms. But we would say this account is helpful as it ensures reliability as well as transparency. However, some brokers may keep some hidden policies, which can be devastating sometimes. So, it is recommended to follow some forex broker reviews and go with the best-reviewed ones.
More Forex Accounts
Mini & Micro Accounts
Rollover Free Accounts
After going through all the scenarios of segregated accounts, we can say that it is a mandatory feature to have by all the brokers. But it is not necessary that all the brokers can give you the proper safety. However, you can avoid the risks and get your own safety by selecting the broker that works in favor of the traders. So, they may select the right broker after looking at their key elements.