Broker Segregated Accounts and SIPC Protection Explained

When a broker fails, your protection depends on whether your funds were segregated and which backstop applies. The 2008 MF Global and 2022 FTX failures proved segregation is only as good as its enforcement.

Segregation Mechanics

Under SEC Rule 15c3-3 (Customer Protection Rule), broker-dealers must hold customer cash and securities in special reserve accounts separate from proprietary assets. A weekly reserve formula computation sets the minimum cash held for customers; shortfalls must be cured within one business day. The broker cannot use customer assets to finance its own business.

Under CFTC Regulation 1.20, FCMs must hold customer funds in segregated accounts at approved depositories with daily computation. Customer funds are not available to general creditors in an FCM bankruptcy.

SIPC Coverage

The Securities Investor Protection Corporation restores customer assets when a SIPC-member broker-dealer fails.

• $500,000 per customer, including up to $250,000 for cash.
• Covers missing securities/cash due to broker failure, not market losses.
• "Per customer" is determined by capacity and account type; a cash and margin account at the same broker generally count as one.

What SIPC Does Not Cover

Market decline, forex accounts (forex dealers are not SIPC members), futures accounts (covered by CFTC segregation), commodity pools or unregistered securities not held by the SIPC-member, and losses from fraud or bad advice — those are FINRA arbitration or regulatory matters.

Excess SIPC Coverage

Most major brokers carry excess SIPC insurance above the $500,000 cap, often $100+ million aggregate with a per-customer sublimit (commonly $1–5 million for securities, lower for cash). Read the policy — sublimits and exclusions vary.

Practical Example

You hold $1.2M in stocks at a SIPC-member broker that fails with a $400,000 shortfall. SIPC restores up to $500,000; excess SIPC covers the remaining shortfall up to its sublimit. If your positions are intact in street name, you simply transfer them out — SIPC steps in only for missing assets.

Red Flags and Diligence

1. Commingling: any broker that pools customer funds with operating capital is a seizure waiting to happen. MF Global's failure was a segregation breach.
2. Rehypothecation: margin accounts allow the broker to pledge your securities as collateral for its own borrowing. You can opt out of lending programs in a cash account.
3. Offshore brokers: typically no SIPC, no segregation equivalent, no excess insurance. Your only recourse is the local regulator.

Action Points

1. Confirm SIPC membership at sipc.org before depositing.
2. Split large accounts across two SIPC-member brokers to stay within coverage.
3. Decline stock-lending/yield programs unless the additional risk is worth the rebate.
4. For futures, check the FCM's monthly segregation reports and CFTC net capital filings.

Segregation is the firewall; SIPC is the backstop. Verify both before you fund, not after the broker stops answering the phone.