The basic idea
When a client deposits money with a broker to trade, that money still belongs to the client. The broker holds it to cover margin and settle trading results, but it is not the broker's money to spend. Client money segregation is the set of rules and practices that keep those funds separate from the broker's own funds, so that if the broker fails, the client money can be identified and returned instead of being swept into the broker's insolvency.
Most financial regulators that license brokers require some form of segregation. The detail differs between regimes: which bank accounts qualify, how often reconciliations happen, how unrealised profits and losses are treated, and what happens to interest. But the core principle is shared. Client money sits in accounts that are clearly designated as holding client funds, and the broker's own money sits elsewhere.
What counts as client money
In general terms, client money is money the broker receives or holds for a client in connection with its investment business. For a CFD or forex broker that typically includes:
- Deposits received from clients that have not yet been used.
- Margin held against open positions.
- Realised profits credited to a client account and not yet withdrawn.
- Withdrawal requests approved but not yet paid out.
Money that the broker has earned, such as spreads, commissions and swap charges that have been properly debited from client accounts, becomes the broker's own money once it is due. So does the broker's share capital, its retained profits and money it borrows. Fees paid by the broker to vendors and salaries paid to staff come out of corporate funds, never out of client accounts.
The line between the two shifts every day as clients trade. That is why segregation depends so heavily on accurate, frequent reconciliation.
Designated client accounts
Segregated client money is usually held in bank accounts that are titled to show their status, for example by including the words client account or client money in the account name. Many regimes also require the broker to obtain an acknowledgement letter from the bank confirming that the funds belong to clients, that the bank has no right of set-off against them for the broker's own debts, and that the account is distinct from the broker's corporate accounts.
Some regulators allow, within limits, client money to be held with other parties such as payment institutions or, for margin purposes, with liquidity providers. Where that happens, the broker typically needs to assess the institution, spread risk across more than one provider and record exactly where each portion of client money sits. Rules on this vary noticeably between jurisdictions and between retail and professional client money, so brokers should follow their own regulator's rules closely.
Reconciliation: how segregation is proved
A segregated account on its own proves very little. What matters is that the amount in client accounts matches what the broker owes its clients. Reconciliation is the daily exercise that checks this.
A typical internal reconciliation compares two figures. The first is the client money requirement: the total the broker owes clients according to its own records, built up from client equity on the trading platform. The second is the client money resource: the actual balance in segregated accounts, according to bank statements. If resource is lower than requirement, there is a shortfall, and the broker must top up the client accounts from corporate funds promptly. If resource is higher, the excess belongs to the broker and can be withdrawn to corporate accounts, provided the calculation is correct.
Illustrative example: suppose that at close of business the platform shows total client equity of EUR 4,200,000, and the bank statements for the segregated accounts show EUR 4,150,000. The shortfall of EUR 50,000 must be transferred from the broker's own account into the client account, and the reason for the difference investigated. The cause might be a pending withdrawal, a card chargeback, a timing difference on a payment processor settlement or a booking error. Whatever the cause, it is recorded and resolved.
External reconciliations, comparing the broker's internal records to bank and processor statements, sit alongside the internal one. Auditors and regulators review both.
Common segregation failures
Regulators around the world have sanctioned brokers for segregation breaches, and the failures follow familiar patterns:
- Paying business costs from client accounts: settling a marketing invoice or a platform licence fee out of the client account, even temporarily, is a clear breach.
- Late top-ups: identifying a shortfall but waiting days to fund it.
- Wrong calculation basis: excluding negative equity accounts incorrectly, or misstating unrealised profits, so the requirement looks lower than it is.
- Mixed processor accounts: payment processor settlement accounts that receive both client deposits and other income without clear separation.
- Missing acknowledgement letters: segregated accounts that are segregated in name only.
- Intragroup confusion: client money belonging to one group entity being held in an account of another.
Most of these failures start as small operational shortcuts. A finance team in a hurry pays a vendor from whichever account has funds. Strict separation of account access, together with payment approval rules that check the source account, prevents most of them.
Why segregation matters to payments partners
For a bank or payments provider, the segregation question is more than regulatory housekeeping. It defines what each account is for, and therefore what transactions the partner should expect to see.
A segregated client account should show client deposits coming in, client withdrawals going out, transfers to and from the broker's corporate account for profit extraction or shortfall top-ups, and possibly margin transfers to liquidity providers where the regime allows. It should not show salary payments, office rent or software subscriptions.
A corporate account should show the reverse: revenue received from the client account once earned, payments to vendors, staff and introducing brokers, intra-group transfers and tax payments. It should not receive deposits directly from retail clients.
When a partner sees transactions that do not match the declared purpose of an account, that is a monitoring alert. Mixed flows are among the most common reasons brokers face extended reviews or account closures, even where nothing improper has happened.
How segregation affects the choice of provider
Because client money and corporate money carry very different risks, many brokers work with separate providers for each. Client money providers need to be comfortable with retail payment methods, chargebacks, high transaction counts and the regulatory requirements around client accounts, including acknowledgement letters. Corporate providers deal with fewer, larger payments to known counterparties.
A corporate payments provider that does not handle client money will usually say so clearly and will build its controls around that policy. In practice that means it will ask the broker to confirm that no client funds will pass through the account, check inbound payments to make sure they come from the broker's own accounts or known business counterparties, and question any transfer that looks like a retail deposit or a client payout.
These checks protect the broker as much as the provider, because they keep the corporate account clean and make the broker's segregation easier to evidence to its own regulator and auditor.
A practical account setup
A setup that works for many mid-sized brokers looks roughly like this:
- Segregated client accounts with one or more banks or permitted institutions, with acknowledgement letters on file, used only for client funds.
- Payment processor accounts for card and local payment methods, settling into the segregated client accounts.
- A main corporate operating account receiving earned revenue transferred from client accounts after reconciliation.
- A corporate payments account used for outbound business payments: liquidity provider top-ups from corporate funds, vendor invoices, introducing broker rebates and intra-group transfers.
- Clear written rules on who can move money between each account, with dual approval for transfers out of client accounts.
The daily reconciliation drives the transfers between client and corporate accounts. Nothing moves from the client side to the corporate side unless the reconciliation shows an excess, and the evidence is kept with the transfer record.
Records and evidence to keep
Good records make segregation easy to demonstrate. Brokers typically keep daily reconciliation reports with sign-off, bank acknowledgement letters, a register of all client and corporate accounts with their purpose, records of every transfer between client and corporate accounts with the supporting reconciliation, investigations of breaks and how they were resolved, and board or committee minutes reviewing client money arrangements.
Records should be kept for at least the retention period set by the broker's regulator and by local company and AML law, whichever is longer. Storing them in a structured way, by date and by account, means a request from an auditor or partner can be answered in hours instead of days.
When a payments partner asks how segregation works, being able to share a redacted reconciliation and the account register usually answers most questions in one step.
General information only
This article is general information about how client money segregation works in brokerage and why it matters to payments partners. It is not legal, regulatory or accounting advice. Segregation rules differ by regulator and client type, and brokers should follow their own regulator's rules and take professional advice.
CCYFX provides Foreign exchange, International payments, and Collections and payouts to businesses. It does not hold or move broker client money. For further background, see our CFD brokers page or our compliance overview.
