Segregating client money from a firm’s own money is meant to keep customer assets out of the pool that general creditors fight over when the firm collapses. It works, but not the same way everywhere, and it is not a guarantee of getting everything back, or getting it back quickly. What segregation actually delivers depends on which country’s insolvency law applies to the failed firm and, in some cases, on whether the account is held individually or pooled with other clients.
Three regulated versions of “segregated”
In the UK, the Financial Conduct Authority’s client money rules (CASS 5.5) require a firm to hold client money separate from its own money, and state that this segregation supports a trust arrangement intended to make clear the difference between client money and the entitlements of the firm’s general creditors if the firm fails, according to the FCA Handbook, last updated 2 August 2024.
In US futures markets, the CFTC requires futures commission merchants to keep all customer funds used to margin or guarantee futures trading apart from the firm’s own funds, in accounts titled for the customers’ benefit, with agreements that stop a bank or clearinghouse from offsetting the firm’s own debts against that account, according to the CFTC’s published guidance on FCM segregation. If the firm becomes insolvent, segregated customer funds get a bankruptcy preference. But the CFTC is explicit that this preference has a limit: if the segregated pool is not large enough to cover what customers are owed, the remaining shortfall is paid out pro rata alongside claims from the firm’s other unsecured creditors, meaning customers are not made whole automatically.
For US securities, the SEC’s Customer Protection Rule (Exchange Act Rule 15c3-3) requires a broker-dealer holding customer securities and cash to segregate them from its own proprietary trading activity, according to the SEC’s Small Entity Compliance Guide, dated 14 July 2017. The same guide explains that these rules exist precisely to increase the odds that customer assets survive intact if the firm fails. But the guide also flags the scenario where segregation is not enough on its own: if a broker-dealer misappropriates or converts customer assets, the Securities Investor Protection Corporation can step in with a liquidation proceeding, and SIPC’s payout is capped at $500,000 per customer, of which only $250,000 can be used to cover a cash shortfall, per the same SEC guide. Segregation reduces the chance of that scenario; it does not eliminate the cap that applies once it happens.
The same SEC guide also describes narrower plumbing rules that shape how safe the segregated pool itself is: broker-dealers may hold no more than 15% of a non-affiliated bank’s equity capital in a customer reserve account, and a previous rule that had capped capital withdrawals at 30% of a firm’s excess net capital was replaced with a discretionary power for the Commission to restrict withdrawals by order, both per the SEC guide of 14 July 2017. Separately, the Futures Industry Association’s FAQ, revised November 2014, states that a non-US bank or trust company can hold pooled US customer segregated futures funds only if it has more than $1 billion of regulatory capital.
The worked example: ISA versus OSA at the same bank, two different insolvency laws
JPMorgan Chase Bank’s own disclosure under the EU/UK Central Securities Depositories Regulation, dated 15 October 2020, is a useful test case because it describes what actually happens to two different types of segregated account at the same institution under two different legal systems.
JPMorgan offers clients an Individual Client Segregated Account (ISA), which holds one client’s securities only, and an Omnibus Client Segregated Account (OSA), which pools several clients’ securities together but keeps the bank’s own proprietary securities out. The bank’s disclosure states that if it became insolvent, its proceedings would run under US insolvency law – either the Federal Deposit Insurance Act or the Dodd-Frank Orderly Liquidation Authority. Under that framework, securities held in Segregated Accounts, ISA or OSA, form part of the bank’s estate and are distributed to customers who file claims, satisfied pro rata from the pool of segregated assets. JPMorgan’s own conclusion, stated directly in the disclosure, is that there is no legal benefit under US insolvency law to holding securities in an ISA rather than an OSA – the treatment is identical.
Under English insolvency law, the same disclosure describes a different outcome: securities the bank holds for clients, in either an ISA or an OSA, do not form part of the bank’s estate for distribution to creditors at all, so long as they remain the clients’ property. Clients would not need to file a claim as an unsecured creditor to get them back, and the securities would not be subject to a bail-in. The account structure is the same in both jurisdictions; the legal consequence of the same structure is not.
The civil-law twist: segregation can prove ownership without creating it
A 2012 CapLaw article by Renato Costantini draws a distinction that the UK and US examples above do not surface, because both are common-law systems. In civil-law jurisdictions such as Switzerland, the article explains, the name on an account does not by itself decide who owns the assets in it. If a custodian holds securities on a client’s behalf, segregating those securities from the custodian’s own assets does not, on its own, create or strengthen the client’s ownership claim – that claim rests on the underlying legal relationship. What segregation does provide, per the same article, is evidence: when assets are pooled through several layers of custodians and sub-custodians, proving which assets belong to which client in an insolvency becomes harder, and clean segregation makes that proof easier to establish. The article is also blunt that segregation is no guarantee of a faster payout even where it helps prove ownership, because liquidators may still take time returning assets, particularly where a lien or security interest is involved.
What this page does not tell you
This page describes segregation rules for regulated intermediaries operating under specific regimes: FCA client-money firms in the UK, CFTC-registered futures commission merchants and SEC-registered broker-dealers in the US, and one bank’s own CSDR disclosure covering EEA and UK central securities depositories. It does not tell a reader what a “segregated account” on a crypto exchange means, because most crypto exchanges are not registered as broker-dealers, FCMs or CASS firms, and are not automatically bound by any regime described here unless they hold one of those specific licences.
The SIPC coverage limits and the CFTC’s bankruptcy-preference mechanism are specific to US law; this page has not attempted to catalogue every country’s insolvency treatment of segregated accounts, and a reader dealing with a firm regulated somewhere else should not assume either regime applies. The Federal Register notice on daily computation of broker-dealer reserve requirements, published 13 January 2025, could not be reviewed for this page because the source blocked automated access, so this page cannot describe what that specific rule change altered. Whether Switzerland’s civil-law ownership analysis, as described in the 2012 CapLaw article, still holds under current Swiss law was not checked against a more recent primary source. JPMorgan’s disclosure also flags that a shortfall between what a custodian owes and what it actually holds would be allocated differently between an ISA and an OSA, but the fuller mechanics of that difference are not included in the portion of the document reviewed here. Finally, none of the figures above – the $500,000/$250,000 SIPC caps, the $1 billion bank-capital threshold, the 15% and 30% limits – are current guarantees; they are the terms stated in documents dated between 2014 and 2020, and rules of this kind are amended over time.
Sources
Every fact above is attributed to one of these reports. Where they disagree, the article says so.
