Segregated account

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Segregated account is a bank account or securities account in which a customer's funds are held separate from the funds of a brokerage firm. Thus, for example, in the United States the law requires that a broker must hold separately, in separate accounts on the broker's books, securities it holds for its customers from securities of the broker itself.[1]

This is done to create a clear separation between the two groups of money so client funds are not used for the wrong purpose. A central reason for the rule is that it also helps ensure that the money or securities can be easily identified as belonging to customers in case a firm becomes bankrupt. In many jurisdictions segregated accounts cannot be used to pay creditors during a liquidation and must be returned to the customers directly.

In most countries brokerage firms must maintain a segregated account on the brokerage firm's books to make sure that the client's money and the firm's money is not intermingled, and clients funds are not used for operational purposes.

Historically, unscrupulous stock brokers have used clients funds for their own use, which often resulted in the failure of the brokerage with the loss of client funds. Holding a segregated account is some measure to protect against such unscrupulous and fraudulent behaviour.

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