The morning a broker suspends trading, the client-facing part is over in an hour. Withdrawals stop, the platform goes read-only or disappears, and a notice appears on the website. What follows takes months and sometimes years, and it runs on a body of rules most clients have never read: how client money is pooled, how a shortfall is shared, and who gets paid before whom.
The outcome for a client depends on three things in order. Was the money genuinely segregated. Are the books accurate enough to reconstruct entitlements. Is there a compensation scheme behind the licence. Get all three and recovery is usually high and slow. Miss the first two and the third one, where it exists, becomes the only route to anything at all.
Segregation is a legal status, not a bank account label
Under most serious regimes, money a firm holds for clients is not the firm's property. It sits in designated accounts at credit institutions, held on trust or under an equivalent statutory concept, and the firm's own working capital is kept separately. The point of client fund segregation is precisely the insolvency case: creditors of the firm cannot reach money that never belonged to the firm.
Segregation only works if it is performed daily and reconciled. Firms are typically required to calculate their client money requirement each business day, compare it to what is actually in the segregated accounts, and top up any shortfall from their own resources the same or next day. Where firms fail catastrophically, the failure is almost always in that daily discipline: reconciliations skipped, client money used to fund operations, or unsegregated amounts sitting in a house account "temporarily" for weeks.
The pool and the shortfall rule
When a firm enters insolvency, segregated client money is normally treated as a single pool rather than as individual accounts. Each client has a claim against that pool proportional to their entitlement on the day the pooling event occurs. If the pool holds 80 percent of total entitlements, every client in the pool receives roughly 80 percent, regardless of whether their own money happened to be in a properly reconciled account.
That rule is fair in the sense that it prevents a race, and brutal in the sense that a well-documented client shares the loss caused by a badly documented one. It also means the size of any shortfall is discovered late. The administrator has to reconstruct entitlements from the firm's records, and where a broker ran an internal ledger that never matched the platform, that reconstruction is the slow part of the process.
Open positions add another layer. A client's entitlement usually has to be crystallised at a valuation point, which means live trades are closed at whatever prices the administrator can defensibly use. Clients who believe a winning position would have run further have no claim on that hypothetical, and clients in losing positions have those losses locked in.
A common misunderstanding: unrealised profit on an open trade is not protected money sitting in a bank. It is a claim against the firm, and its value in an insolvency is whatever the valuation and the pool support.
Special administration and why it exists
Several jurisdictions created insolvency procedures specifically for investment firms, because the ordinary corporate process is designed to maximise returns to creditors and is a poor fit where the main task is returning assets that were never the company's. The specialised regimes give the office-holder statutory objectives that include returning client assets promptly and engaging with the regulator, alongside the usual duties.
In practice the administrator must first take control of the platform and its data, then freeze and verify bank positions, then build a client ledger, then invite claims and adjudicate them. Every stage has a cost, and those costs are generally paid out of the estate, which in some structures means out of the client money pool itself. That is one reason recovery percentages fall as a case drags on.
Firms are supposed to make this easier before anything goes wrong. Regulators increasingly expect a resolution pack: an up to date list of client money accounts, bank mandates, the location of records, and contacts at every provider, kept current so that an insolvency practitioner can act in days rather than months. Firms that maintain proper compliance audit trails as an operating habit produce these packs almost for free, and firms that do not spend a fortune assembling them under pressure.
Compensation schemes and their limits
Where a shortfall exists and the firm is a member of a statutory scheme, eligible clients can claim the shortfall up to a per-person limit. The scheme pays the gap between what the pool returns and the client's entitlement, not the entitlement itself, and it applies per person per firm rather than per account. The mechanics differ by jurisdiction, and the eligibility rules exclude several categories of claimant, so the investor compensation scheme covering a licence is worth reading before opening an account rather than after.
Three limits catch people. Cover applies to the licensed entity that held the money, which may not be the brand on the website. Professional and corporate clients are frequently outside scope, which is one reason professional client status is a trade rather than an upgrade. And schemes generally cover the failure of the firm, not trading losses, platform outages or disputed executions, which route instead to a financial ombudsman scheme while the firm is still solvent.
Offshore is a different picture
Many popular retail brokers operate under licences from jurisdictions with no compensation scheme, thin capital requirements and limited on-site supervision. Segregation may be required on paper, but the enforcement capacity behind that requirement is what determines whether it was real. When such a firm fails, clients are ordinary creditors in a local liquidation, filing claims in a foreign legal system, often with no realistic prospect of an economic recovery.
This is not an argument that every offshore licence is a fraud. It is an argument that the licence determines what happens on the worst day, and that the difference between a strictly supervised regime and a light one is invisible while everything works. The comparison in regulated versus unregulated brokers is really a comparison of insolvency outcomes.
What firms should build before they need it
For anyone operating a brokerage, the lesson from published wind-ups is operational rather than philosophical. Reconcile client money daily and keep the evidence. Make the internal ledger and the platform agree automatically instead of by spreadsheet. Keep the resolution pack current. Hold capital above the floor rather than at it, because regulatory capital requirements are a minimum, not a target.
SINGUARD's Executive Directors, Alex Onta & Roman Onta, work with operating firms on exactly this kind of record-keeping architecture, because software that produces a defensible client ledger on any given day is worth more in a crisis than any amount of policy documentation. SINGUARD builds software and does not hold client money for anyone.
"Every wind-up I have read reaches the same bottleneck. Not the bank balance, the books. If nobody can prove who owns what, the money sits there while the costs eat it."
— Roman Onta, Executive Director, SINGUARD
Key Takeaways
- Segregated client money is normally pooled at insolvency, so every client shares any shortfall proportionally rather than recovering their own account in full.
- Open positions are crystallised at a valuation point, and unrealised profit is a claim against the estate rather than protected cash.
- Compensation schemes cover the shortfall up to a per-person limit, apply to the licensed entity, and commonly exclude professional and corporate clients.
- Under licences with no scheme and light supervision, clients become ordinary creditors in a foreign liquidation with limited practical recovery.
Frequently Asked Questions
Is segregated money always returned in full?
No. Segregation protects client money from the firm's general creditors, but if the segregated pool is short of total entitlements, every client in the pool takes a proportional reduction and any compensation scheme covers only the gap up to its limit.
What happens to open trades when a broker fails?
They are normally closed and valued at a point set by the office-holder, and the resulting balance becomes the client's claim. There is no claim on how a position might have performed afterwards.
How long does a broker wind-up take?
It varies widely with the quality of the firm's records. Reconstructing a client ledger, inviting claims and adjudicating them commonly takes many months, and costs incurred along the way are typically met from the estate.
About the Author
Roman Onta is an Executive Director at SINGUARD. He builds the Prop Firm CRM, the Broker CRM, Scalegram and CopySignals side by side with his brother Alex Onta, and he helped on the design of eTrader, the division Alex built and leads. His ground is worldwide payment processing, AML compliance and the corporate structures brokers are built on, work the two of them carry together, shaped by executive roles in the UAE and international corporates. He lives and works in Dubai for most of the year. Meet the executive duo leading Singuard's five divisions.