Quote from Ripley:
Is there something similar to FDIC in futures, where they will insure my account up to $100,000 from a possible bankrupty.
And what should I look for in a Futures Brokerage to estimate their long term solvency.
I am worried because almost most Futures Brokers are fly by the night kind of operations. Ex: Transact Futures, Lions Futures, Alaron, AMT Futures, and who knows when one of them will declare bankruptcy and take my account down with them.
If you have a futures trading account, it takes more than just a broker bankruptcy to cause you a loss. The only way you can get whacked in a futures broker bankruptcy is if public customer funds are embezzled, or if other public customers have uncovered trading losses, larger than the broker's capital cushion in excess of customer deposits. If this happens, then all public customers will take a
pro rata haircut, somewhere between 0% and 100%, whatever is required to cover whatever losses are not covered by consuming the broker's assets.
If a futures broker does go bankrupt, it is very likely that this will happen, either because customer deposits are embezzled, or because customers have such large trading losses, that they blow out the broker's capital. Both of these problems happened at Refco futures, but bankruptcy was avoided by unlawfully concealing the deficit, transferring it to another entity, and then engaging in other fraudulent schemes. This coverup unravelled and sent most Refco entities into bankruptcy, but becaue the deficit was no longer on the Refco futures entity's books, the Refco futures entity did not go bankrupt and survives to this day.
Consider opening a futures trading account at a Canadian broker, because the Canadians have deposit insurance which, unlike FDIC and SIPC, does cover futures trading accounts.
Also consider using a broker, like Interactive Brokers, which has three levels of protection mostly not provided by other brokers. First, every night, any of your funds, in excess of futures margin requirements, are swept into a securities account for which you earn interest and receive SIPC coverage for up to $500,000 in securities and up to $100,000 in cash. Second, IB has much more rigorous risk control, and also has greater capital relative to its risk exposure, than do most other brokers, so it is less likely to bankrupt. Third, Interactive Brokers has a private insurance policy from Lloyds of London, giving you up to $29.5 million coverage for securities and $900,000 coverage for cash, but the total payout for all customers combined is limited to $150 million, to be pro-rated if necessary. Maybe other futures brokers can provide competitive protections; do your research.
Check the regulatory history of futures brokers with NFA and CFTC. If there is a history of failing to meet regulatory capital requirements, or of cooking the books, or of embezzling customer funds, as with Refco since they were fined for doing it repeatedly in 1994, then reject that broker. Look for a broker with an extra capital cushion and private insurance coverage to enable it to avoid or to mitigate bankruptcy. Extra capital is more important than private insurance coverage, because in a black swan market event, insurers may bankrupt and be unable to pay their promised coverage; but the broker's capital is money in the bank.
You are quite correct to worry about fly-by-night brokers. I would definitely encourage you to worry.
And don't even think about trading retail spot FX, except maybe at IB, if their insurance coverage applies (you should ask them).
