What Happens If Your Futures Broker Goes Bankrupt?

If your futures broker goes bankrupt, the money in your account becomes part of a pool called customer property, and you get a share of that pool proportional to what you are owed. You are ahead of the firm's other creditors in the queue, and the risk disclosure a broker has to get a retail customer to sign before opening the account says those funds are not protected by insurance if the firm goes under. The rules that produce this outcome are subchapter IV of chapter 7 of the Bankruptcy Code and 17 CFR part 190, the Commodity Futures Trading Commission's bankruptcy rules for commodity brokers.

What happens to the money in your futures account if your broker goes bankrupt?

A failed futures commission merchant is wound up under a bankruptcy regime written specifically for commodity brokers. What the firm held for customers is gathered into the customer estate, which 17 CFR 190.01 treats as the same thing as customer property. Section 190.09(a)(1) lists what goes into it: property held to margin or secure a commodity contract, the open contracts themselves, letters of credit, and anything segregated for customers on the filing date, among other categories. Paragraph (a)(1)(ii)(L) extends it to the firm's own property, including its trading and operating accounts, but only so far as everything else is not enough to pay public customer claims in full. Then 11 U.S.C. 766(h) directs the trustee to hand that estate out ratably, measured by each customer's allowed net equity claim.

That ranking is strong. Under 766(h), customer claims sit ahead of every other claim against the estate, with one carve-out: the administrative expenses of running the customer estate itself. Section 190.00(c)(3)(i) adds a second tier inside the customer group — a retail trader is a public customer, defined in 190.01 by reference to the section 4d(a) segregation rules, and public customers rank ahead of non-public ones. Claims based on the firm's own proprietary accounts come last, and under the closing paragraph of 766(h) they receive nothing out of customer property until every other customer claim has been paid in full.

Ranking first is not the same as being paid in full. If the estate is short, 766(j)(2) turns the unpaid remainder of your claim into an ordinary unsecured claim distributed under section 726 of the Bankruptcy Code, alongside everybody else the firm owed money to. That is the gap the rest of this post is about.

Is a futures account insured, and does SIPC cover it?

The Risk Disclosure Statement whose wording is prescribed at 17 CFR 1.55(b) rules out insurance three ways: point 2 states that funds deposited with an FCM for futures trading are not protected by insurance if the firm goes bankrupt or insolvent, or if the funds are misappropriated; point 3 rules out the Securities Investor Protection Corporation, and says it makes no difference if the same firm is also registered with the SEC as a broker-dealer; point 4 says a derivatives clearing organization generally does not guarantee or insure the funds either, while noting that some clearing organizations run limited programs worth asking about.

Securities customers at the same firm are in a different position, which is where the sense of unfairness in this subject comes from. Writing in farmdoc daily in January 2014, Paul Peterson of the University of Illinois set out the contrast as it stood after the MF Global and Peregrine Financial Group collapses. His figures below are as published in January 2014; the futures-side rule citations are ours:

Peterson traces the idea of a futures-side equivalent back to the CFTC's creation in 1974, records that the CFTC commissioned a National Futures Association study which was completed in November 1986, and writes that no further action was taken after that report was released. Our post on whether you can lose more than you invest in futures covers the rest of the 1.55(b) statement, including the deficit you still owe after a position is liquidated against you.

Why can customer money go missing if it is segregated?

Segregation is a duty imposed on the broker rather than a wall around your individual balance. Under 17 CFR 1.20(a), an FCM has to account separately for futures customer funds, hold them under an account name that identifies them as customer funds, and keep enough in those accounts at every moment to meet, in aggregate, everything it owes its futures customers. The phrase doing the work there is "in the aggregate".

Point 5 of the 1.55(b) disclosure spells out the consequence that surprises people: no FCM holds a separate account for your individual benefit, customer funds are commingled in one or more accounts, and a customer can be exposed to losses run up by other customers where the firm's own capital cannot absorb them. Peterson's article supplies a documented case. In March 1985, Volume Investors Corporation failed when three customers could not meet a $26 million margin call, and the firm liquidated roughly $3.6 million belonging to about 100 customers who had nothing to do with it; the owners eventually repaid that money personally.

The other route to a shortfall is the firm breaking the rule. In Release 6300-12 of 10 July 2012, the CFTC announced a complaint against Peregrine Financial Group and Russell R. Wasendorf Sr. alleging that the firm told an NFA audit that July it held more than $220 million of customer funds when it held approximately $5.1 million, had failed to keep adequate funds in segregated accounts since at least February 2010, and had filed false statements with the Commission about what was in segregation. Those were allegations in a complaint. Against that history, Peterson's count of 83 futures brokerage failures across the 75 years to January 2014 — an average of about one a year, with 14 in 1939, 11 in 1978, and no failures at all in 42 of those years — is the useful base rate.

What does a pro rata distribution do to your balance?

Pro rata means every customer in your account class takes the same percentage haircut, and it is applied class by class. Section 190.00(c)(2) sets up four classes: futures, foreign futures, cleared swaps, and delivery. An ordinary retail futures account sits in the futures class: 190.01 defines a public customer there as a futures customer whose account is subject to the section 4d(a) segregation rules. A position carried on a foreign exchange sits in the foreign futures class instead, where the same definition makes a public customer a 30.7 customer subject to § 30.7 segregation. Under 190.09 the property allocated to each class is a separate estate, so the foreign futures class is a separate pool with its own shortfall.

Section 190.00(c)(5) then does the arithmetic. Where the property in a class falls short of what the public customers of that class are owed, it is shared out in proportion, so each of them bears the identical proportional loss against their allowed claim. Property that cannot be attributed to one class, or that exceeds what its own class needs, is pushed across to classes still short. Non-public customers get nothing while any class is short on its public customer claims. Paragraph (c)(5)(ii) is explicit that posting specifically identifiable property or a letter of credit does not buy you out of this, and the same paragraph carves out two special cases in appendix B to the part: cross-margin accounts, and funds held outside the US or in a non-US currency.

Your share has a name. Section 190.08(c) defines a funded balance as your pro rata share of the estate for one account class, and 190.08(a) adds those balances together into your funded net equity claim. The claim they divide is built in 190.08(b): the ledger balance, plus the open trade balance, plus the market value of other property held for the account at the prior day's close with accrued interest, less anything you owe the firm. Step 2 of that section aggregates your accounts of the same class held in the same capacity, so three futures accounts in your own name are aggregated into a single claim.

Can your open futures positions be moved to another broker?

The rules prefer to move your positions to a healthy broker rather than close them. Section 190.00(c)(4) calls this porting and states it as a policy preference: transfer the open positions of the debtor's public customers to another FCM, along with all or part of the account equity. Section 190.07(d)(1) puts a clock on it, requiring the trustee to use best efforts to move every eligible account, position and holding of property across within seven calendar days of the relief order.

Section 190.07(c) makes every commodity contract account eligible, including accounts holding no open positions, and then excludes three things: the broker's own account, the accounts of its general partners if it is a partnership, and accounts that are in deficit. A partial transfer is permitted — 190.07(d)(2)(i) says the Commission will not disapprove one merely for being partial — but splitting a single customer's account cannot increase anybody's net equity claim, and both legs of a spread or straddle have to move together or stay together so far as practicable. Once your positions land at the new firm, 190.07(b)(2)(ii) makes it hold them open for at least one business day, unless you ignore a call to top the transferred margin up to whatever that firm would normally require, and it cannot charge you a commission on the transfer. Section 190.07(b)(4)(i) assigns your old account agreement to the new broker by operation of law, and says a failure to segregate by the old firm is neither the new firm's default nor a defence against it; under (b)(4)(ii) none of that applies if you already had an account agreement with the firm receiving the transfer, in which case that agreement governs.

What happens to open positions that cannot be transferred?

Positions that nobody can take on get closed out. Under 11 U.S.C. 766(e) the trustee must close out a contract where the customer gave no timely instruction, where it cannot be transferred, or where it cannot be identified to a particular customer. Section 766(b) sets a hard outer limit for everything else: no position may stay open past the last trading day or the first day a delivery notice can be tendered, whichever arrives first, which matters because 190.00(c)(6) confirms a physically settled contract held into a delivery position carries a real delivery obligation. Until a contract is returned or transferred, 766(a) has the trustee answering margin calls on specifically identifiable commodity contracts, capped at what you would be entitled to anyway.

Property other than contracts is handled separately: 766(c) has the trustee promptly returning specifically identifiable property, or passing it to a broker that is not in bankruptcy, up to your entitlement, and 766(f) turns the rest of the estate's securities and other property into cash. For how margin behaves in normal conditions, see day trading margin versus overnight margin.

What does a customer have to do in a commodity broker bankruptcy?

You have to file a claim, and you have to answer the trustee's notices on time. Section 190.03(c)(4) requires the trustee to notify every customer promptly once the order for relief is entered and to instruct each one to file a proof of customer claim, with the bar date for filing printed on the form itself. Missing that date is one of the few failures in this process a customer controls.

The notice you may have to act on faster concerns specifically identifiable property that is not an open position. Under 190.03(c)(1), the trustee tells affected customers that such property may be liquidated from the seventh day following the relief order — or another date the trustee sets with Commission or court approval — unless the customer asks in writing for its return before the deadline in the notice. Section 190.03(a)(2) says how the notices arrive: the trustee sets its own procedure after consulting the Commission, and absent good cause that procedure should include a prominent website as well as messages to the electronic addresses in the firm's own records. So the address on your account is the address that matters.

Section 190.03(e) is the list the trustee has to ask you for, to the extent reasonably practicable and at its own discretion on the details: which of the four account classes the claim arises in, whether you are a public or non-public customer, how many commodity contract accounts you held, and for each one the account number, the name on it, the capacity it is held in, the last statement balance and any activity after that statement up to the filing date. It also asks for copies of the documents that back the answers — confirmations and account statements among them — which is a reason to keep yours somewhere other than the broker's website. A template form sits in appendix A to the part, and 190.03(f) says the trustee may use it but does not have to.

Does any of this apply to a simulated funded account?

None of it applies, because there is no futures commission merchant holding money for you. A funded account at a prop firm of this kind is a simulated account trading live market data, and our help center page on whether this is real money says plainly that the capital is not a brokerage account held in your name. With no customer funds at an FCM, there is no net equity claim under 11 U.S.C. 766, no account class under 17 CFR 190.01, and no funded balance to compute under 190.08.

What you hold instead is contractual. You paid a fee for the opportunity to trade to a set of published rules, and a right to a share of the profit you produce under them, which is a claim against the firm rather than a share of a segregated pool. The post on who the counterparty is in a futures trade works through the same contrast from the clearing side, including what 17 CFR 1.20 segregation does and does not cover for someone trading a real account. Our risk disclosure sets out what the simulated product is.

The useful takeaway runs the other way. If you pass an evaluation here and eventually trade a real futures account somewhere, everything above becomes yours: the segregation duty sits on the broker, a shortfall is shared out across the account class, the 1.55(b) disclosure tells you the funds are not insured against the firm's failure, and the quality of the firm holding your money becomes a risk you are choosing. Point 12 of the 1.55(b) disclosure notes that the CFTC requires every FCM to publish firm-specific disclosures and financial information on its own website, for exactly that assessment.

FAQ

How long does it take to get your money back if your futures broker fails?

The rules move positions faster than they move cash. Section 190.07(d)(1) sets a best-efforts deadline of seven calendar days from the relief order for moving eligible accounts and property to another firm. Final distribution runs on the claims process: proofs of claim with a bar date under 190.03(c)(4), and funded balances revised under 190.08(c)(2) as claims are added, disallowed or valued. Peterson records MF Global futures customers still waiting after more than two years in January 2014.

Are futures customers paid before the broker's other creditors?

Yes. Under 11 U.S.C. 766(h) the trustee distributes customer property to customers ahead of all other claims, except administrative claims attributable to running the customer estate. Section 190.00(c)(3)(i) puts public customers ahead of non-public customers within that priority. The limit is 766(j)(2): whatever part of your allowed net equity claim the customer estate cannot cover becomes an ordinary claim distributed under section 726 of the Bankruptcy Code, with no priority left.

What is a proof of customer claim?

It is the filing that establishes what you are owed. Under 17 CFR 190.03(c)(4) the trustee must instruct every customer to file one and must print the bar date on the form. Section 190.03(e) sets out what the trustee has to ask for, to the extent reasonably practicable: the account class the claim arises in, your status as a public or non-public customer, the accounts you held with their balances and later activity, and copies of the documents behind the answers, customer confirmations and account statements among them.

Can your positions be moved to another broker without your instruction?

Yes, and the rules prefer it. Section 190.00(c)(4) states a policy preference for porting public customers' open positions to another FCM with some or all of the account equity, and 190.07(c) makes every commodity contract account eligible, including accounts holding no positions, apart from the broker's own account, the accounts of its general partners where it is a partnership, and accounts in deficit. Where a transfer is not possible, where the customer gives no timely instruction, or where the contract cannot be identified to a particular customer, 11 U.S.C. 766(e) requires the trustee to liquidate it.