This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
A brokerage bankruptcy is rare, but the bankruptcy can have a significant impact on the trader's funds and on the trader's positions. The trader should understand the protections in place, the steps to take after the bankruptcy, and the realistic recovery expectations. The trader who prepares for the worst can react quickly, and the trader who reacts quickly can minimize the damage.
What happens to the funds in a bankruptcy
The first thing to know is that the trader's funds are segregated from the brokerage's operating funds. The segregation is required by the regulator, and the segregation means the trader's funds are not part of the brokerage's estate. The funds are held in a separate account at a custodian bank, and the funds are returned to the trader after the bankruptcy process.
The second thing to know is that the trader's positions may be transferred to another brokerage. The regulator usually arranges the transfer, and the transfer happens within a few days to a few weeks. The trader's positions are preserved, and the trader's positions are not liquidated at the bankruptcy price.
The third thing to know is that the investor compensation scheme may cover the losses. The scheme covers losses up to a certain amount if the brokerage fails to return the segregated funds. The coverage varies by jurisdiction, and the coverage ranges from €20,000 to €500,000 per client.
The steps to take
The first step is to stay calm and to gather information. The trader should not panic, and the trader should not place new trades. The trader should read the brokerage's communications, the regulator's communications, and the news reports. The trader should look for the official announcements, and the trader should not rely on rumours.
The second step is to verify the position and the funds. The trader should check the account balance, the open positions, and the trade history. The trader should download the account statements, and the trader should keep the records in a safe place. The records will be needed for the bankruptcy process and for the tax reporting.
The third step is to follow the regulator's instructions. The regulator will issue instructions on how to claim the funds, how to transfer the positions, and how to file a complaint. The trader should follow the instructions carefully, and the trader should submit the required documentation on time.
The fourth step is to open a new account at another brokerage. The trader will need a new account to continue trading, and the trader should choose a regulated brokerage with a strong reputation. The trader should not rush the decision, and the trader should use the experience to choose a brokerage with better protections.
The fifth step is to consider the tax implications. The bankruptcy may have tax consequences, and the trader should consult a tax advisor. The tax advisor can help the trader report the bankruptcy on the tax return, and the tax advisor can help the trader claim any losses.
The realistic recovery expectations
The first expectation is the timing. The bankruptcy process can take months to years, and the trader may not receive the funds until the process is complete. The trader should plan for the delay, and the trader should have enough liquidity to cover the trading expenses during the delay.
The second expectation is the amount. The trader will likely recover the segregated funds, and the trader will likely recover the positions. The trader may not recover the profits that would have been generated during the bankruptcy, and the trader may not recover the cost of the inconvenience.
The third expectation is the investor compensation. The compensation covers a portion of the losses, and the compensation may not cover the full amount. The trader should check the coverage in the trader's jurisdiction, and the trader should file a claim as soon as the process opens.
How to protect yourself
The first protection is to choose a regulated brokerage. The broker should be regulated in a tier-1 jurisdiction, and the broker should segregate the client funds. The trader should verify the licence, and the trader should read the broker's risk disclosure.
The second protection is to keep a small balance. The trader should not keep all the trading capital at one brokerage, and the trader should keep a portion of the capital at a second brokerage or at a bank. The diversification reduces the impact of a single brokerage failure.
The third protection is to use two-factor authentication. The two-factor authentication adds a layer of security to the account, and the two-factor authentication reduces the risk of unauthorized access during the bankruptcy process.
The fourth protection is to keep the records. The trader should keep the account statements, the trade confirmations, and the tax documents. The records will be needed for the bankruptcy process, and the records will be needed for the tax reporting.
Common questions about brokerage bankruptcy
Are my funds safe if the broker goes bankrupt? The segregated funds are safe, and the funds are returned to the trader after the bankruptcy process. The investor compensation scheme may cover a portion of the losses, and the coverage varies by jurisdiction.
Can I trade during the bankruptcy process? No. The trading is suspended during the bankruptcy process, and the trader cannot place new trades. The trader's positions may be transferred to another brokerage, and the trader's positions are not liquidated at the bankruptcy price.
What if the broker was not regulated? The unregulated broker has no segregation of funds, and the broker has no investor compensation scheme. The trader may lose the entire deposit, and the trader has limited recourse. The trader should always choose a regulated broker.
Related resources
Where to start
If you are concerned about brokerage bankruptcy, the most useful first step is to verify the licence, the segregation of funds, and the investor compensation scheme for the brokerages you are considering. Our broker comparison lists the brokerages by jurisdiction and by regulation, which together tell you what the broker offers before you open the account.