CFD vs futures - fully segregated account

P

PBS

I am about to make a choice between two setups:
1. USD kept at a UK escrow account linked to a UK CFD broker (my funds are in theory fully segregated and the broker debits/credits the account for PnL generated)
2. USD kept with a U.S. FCM in an omnibus account (my funds are commingled with those of other clients).

Trading futures rather than CFDs is better in terms of conflict of interests with the broker, despite the CFD broker claiming they always hedge the client's trades.

However, from fund safety point of view, option 1 wins. But I am concerned that the U.S. might one day devalue all USD kept outside the country in which case option 2 would be life-saving. USD kept offshore might be worth, say, 1/10 of USD kept inside the country. What is the probability of this?

Does anybody know of an FCM that offers a fully segregated account, if that is even possible?
 
Interesting excerpt from FIA FAQ:
"
Would a separate Customer Account maintained solely for the benefit of one customer allow suchcustomer, in the event an FCM were to become insolvent, to avoid sharing pro rata in any shortfalls as required under the Bankruptcy Code?

No. In adopting rules for the protection of Cleared Swaps Customer Collateral, the Commission
determined that any increased protection that might be provided by requiring an FCM to maintain separate accounts for each customer would be minimal. In particular, the Bankruptcy Code provides that non-defaulting public customers of an FCM will share in any shortfall in customer segregated funds pro rata. Under the existing segregation models, therefore, separate accounts would not allow a customer to avoid sharing pro rata in any shortfalls, as required under the Bankruptcy Code. Although the Commission has stated that an FCM may agree to maintain a third-party custodial account on behalf of a Cleared Swaps Customer, third-party custodial accounts would require an FCM to use its own capital to post initial margin with a DCO on behalf of a customer.19 Consequently, such accounts may adversely affect an FCM’s liquidity and would impose additional costs on customers. Importantly, as noted above, the Commission has emphasized that third-party custodial accounts do not provide any greater protection to customers in the event that an FCM fails when there is a shortfall in one or more
Customer Accounts."

Does it mean that there is no point in having a segregated account? Is CFD trading with an escrow (custodial) account really better then?
 
There are other benefits from CFDs over futures. They are an interesting alternative to futures, especially if you are from Europe.
 
ZBZB said:
Option 1 is a bucket shop. You are not trading in a regulated account on a regulated exchange.
More...

It is not a bucket shop - it is a different structure, an OTC market. Biggest hedge funds trade swaps with their prime brokers - in essence, it is also an OTC trade and they count on the prime broker to pay out.

Option 1 is Advanced Markets UK (although they have also an entity in the U.S. and Australia):
- matched principal broker (meaning they have to, under their FCA licence, to hedge every single trade with liquidity provider)
- prime brokers include UBS, Standard Chartered
- FX trading costs/liquidity might be even better than in futures
- transparency on the execution venue and firm's financials (although it is available only after year end)
- most important: custodial (escrow) account (min. deposit $250k; costs $2k per year + $500 to set up) - amazing advantage over futures industry. The only thing is this is with MAcquarie Bank which is one of the owners of Advanced Markets.

Regulated exchange - you mean like LME that only this week CANCELLED some trades and did not require a margin call to be met by brokers carrying the account of one nickel producer from China that happens to own LME through Hong Kong stock exchange?
CME is also a monopoly and God knows what they could do in times of real trouble.
 
PBS said:
It is not a bucket shop - it is a different structure, an OTC market. Biggest hedge funds trade swaps with their prime brokers - in essence, it is also an OTC trade and they count on the prime broker to pay out.

Option 1 is Advanced Markets UK (although they have also an entity in the U.S. and Australia):
- matched principal broker (meaning they have to, under their FCA licence, to hedge every single trade with liquidity provider)
- prime brokers include UBS, Standard Chartered
- FX trading costs/liquidity might be even better than in futures
- transparency on the execution venue and firm's financials (although it is available only after year end)
- most important: custodial (escrow) account (min. deposit $250k; costs $2k per year + $500 to set up) - amazing advantage over futures industry. The only thing is this is with MAcquarie Bank which is one of the owners of Advanced Markets.

Regulated exchange - you mean like LME that only this week CANCELLED some trades and did not require a margin call to be met by brokers carrying the account of one nickel producer from China that happens to own LME through Hong Kong stock exchange?
CME is also a monopoly and God knows what they could do in times of real trouble.
More...

Your bucket shop widens spreads when the market is volatile or think they know your position. At least the CME had limits in wheat.
 
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