Security segregation or client funds, in the context of the

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

industry, refers to regulatory rules requiring that customer

assets In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

held by a

financial institution A financial institution, sometimes called a banking institution, is a business entity that provides service as an intermediary for different types of financial monetary transactions. Broadly speaking, there are three major types of financial ins ...

(generally a

brokerage firm A broker is a person or entity that arranges transactions between a Purchasing, buyer and a sales, seller. This may be done for a commission (remuneration), commission when the deal is executed. A broker who also acts as a seller or as a buyer b ...

) be held separate from assets of the brokerage firm itself in a segregated account and that there is no

commingling In law, commingling is a breach of trust in which a fiduciary mixes funds held in care for a client with their own funds, making it difficult to determine which funds belong to the fiduciary and which belong to the client. This raises particular ...

. Thus, for example, in the United States the law (in particular, the SEC's customer protection rule, Rule 15c3-3) generally requires that a broker must take steps to hold separately, in separate (segregated) accounts on the broker's books, securities it holds for its customers from securities of the broker itself."WHAT HAPPENS WHEN A BROKER-DEALER FAILS?; A SUMMARY OF CERTAIN KEY BANKRUPTCY CODE AND SIPA-RELATED ISSUES"
/ref>"SEC Proposes Amendments to its Financial Responsibility Rules for Broker-Dealers"
/ref> The purpose of the rule is: a) to limit the broker's use of customer securities to support the broker's own business activities; and b) to facilitate the prompt return of customer securities in the event of the broker's

insolvency In accounting, insolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet i ...

. In many jurisdictions segregated accounts cannot be used to pay

creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some propert ...

s during a broker's

liquidation Liquidation is the process in accounting by which a Company (law), company is brought to an end. The assets and property of the business are redistributed. When a firm has been liquidated, it is sometimes referred to as :wikt:wind up#Noun, w ...

and must be returned to the customers directly. This securities segregation requirement was developed due to problems in the U.S.

stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange a ...

s towards the end of the 1960s. At the time, there was not any requirement that brokers segregate client securities from the firm's own assets on the firm's books and records.">"What Happens When A Stock Broker Goes Bust?"
/ref> When brokers went

bankrupt Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the de ...

, therefore, they were unable to return securities to their clients, inasmuch as they had not maintained accurate books and records of their clients' holdings. In the crisis of the late 1960s, a good portion of the net worth (capital) of brokerage houses was held in highly speculative common stocks which were owned by individual partners. When the bear market occurred, alongside contraction of these speculative common stock quotations, the net worth of these brokerage firms declined drastically hence leading to bankruptcy. The partners were speculating with clients' capital which was meant to protect them against financial hazards.

References

Securities (finance) {{Finance-stub

See also

References