I realize there could be some account holders that have determined that “MF” stands for something entirely different in the name MF Global based upon the news that has been coming out. Rather than spend the time here trying to discuss this latest financial market/broker debacle you can read some of the latest MF Global News here
What I wanted to discuss is whether there’s anything an investor can do to avoid these situations by focusing on trading account protection or reduce the odds that you get caught in the crossfire of potential fraud and misappropriation of your funds.
1. The conventional wisdom of course is to ensure your broker is regulated by your countries regulatory financial bodies. In the case of MF Global however, they were clearly registered (CFTC, CME, SIPC) so while this is always best here’s an example that it doesn’t guarantee you protection. Though it certainly counts for something as regulators can move quickly, lock up assets and at least ensure an orderly liquidation to the extend possible.
2. Find out if your broker engages in proprietary “prop” trading. Do some research – did they invest in mortgage backed securities, swaps, derivatives or anything that sounds like it veers away from securing your capital at banks, treasuries and cash.
3. In theory you should confirm that your broker segregates customer funds – meaning your account. However, this is a requirement of the major exchanges and regulatory bodies — and again, you can see that while required, it’s possible this doesn’t get adhered to.
If you want an idea of the questions to ask, and probably what the answers should look like, consider this link from Interactive Brokers account protection. They clearly are going out of their way to describe the various steps they take to protect your account. Of course this is just an example, but make sure you can get this type of response and confirmations from the broker you are going to trust.
As much as we’d like to feel it’s enough that they are registered and compliant, you can see from MF Global that it’s not a 100% guarantee. Nothing is when you trade, but your job is to get as close as you can to 100% security for your account. Trading is challenging enough — we have to know our funds are secure.