The Introducing Broker That Didn't Segregate
A client trades through an introducing broker that routes orders to a futures commission merchant. The client deposits $500,000 with the introducing broker, which is permitted to hold customer funds under its agreement. The FCM's records show only $300,000 attributed to the client's account. The introducing broker explains that $200,000 was 'temporarily applied' to cover its own clearing obligations and would be restored within 30 days. The client's account statement, produced by the introducing broker, shows the full $500,000. The client has open positions with $180,000 of margin requirement. Two weeks later the introducing broker misses a payment to the FCM and the FCM threatens to liquidate the client's positions.
1. Identify the core regulatory failures and the client's exposure.
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The central failure is misuse of customer funds. Customer money must be segregated and used only for the customer's benefit; applying $200,000 to the introducing broker's own obligations is a misappropriation regardless of the promise to restore it. The statement showing $500,000 while only $300,000 reached the FCM is a false record, which compounds the problem.
The client's exposure is direct. Only $300,000 is actually held for her, against $180,000 of margin requirement, leaving a buffer of $120,000. If the FCM liquidates because the introducing broker failed to pay, the client bears the loss on her positions and may have a claim against the introducing broker for the shortfall. But the introducing broker may be insolvent, so recovery is uncertain.
The client should demand immediate written confirmation from the FCM of the funds held for her account, not rely on the introducing broker's statement. She should also ask the FCM whether her account is treated as a customer segregated account and whether the introducing broker is authorized to hold funds at all. Many arrangements require customer funds to go directly to the FCM.
2. What immediate steps should the client take, and what should she have checked before depositing?
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Immediate steps: instruct the FCM in writing to confirm the balance held for her account and to confirm that her positions will not be liquidated pending resolution; demand that the introducing broker return the $200,000 to the FCM immediately and provide evidence of the transfer; preserve all statements, agreements and correspondence; and report the matter to the relevant regulator or dispute-resolution body. She should also consider whether to close or transfer positions to limit further exposure, weighing the cost of liquidation against the risk of continued exposure to a counterparty that has already misapplied funds.
Before depositing, she should have confirmed: who is authorized to hold customer funds; whether funds are segregated at the FCM; how to verify balances directly with the FCM rather than through the introducing broker; the introducing broker's regulatory status and any disciplinary history; and whether statements are generated by the FCM or the introducing broker. A simple check, requiring the FCM to confirm receipt of each deposit, would have exposed the $200,000 gap at the outset. The general lesson is that a statement from an intermediary is not proof of segregation; independent confirmation from the entity holding the funds is.