Tag Archives: SIPC

Is there SIPC Insurance for Futures Accounts?

SIPC Does Not Cover Futures Accounts at MF Global

The MF Global bankruptcy is creating a number of problems for managers with accounts at the firm. One question we have received from some managers is whether their client accounts are insured either through the Securities Investor Protection Corporation (“SIPC”) or through some sort of similar company.  Unfortunately there is no SIPC coverage for futures accounts and it is currently unclear how and when clients will find out whether they wil be made whole.  It is curious that there is no insurance for futures accounts given the Refco collapse in 2005, but with this bankruptcy, we are probably more likely to see calls for the creation some sort of SIPC-like insurance.

SIPC & What Losses are Insured

The following is a description of the SIPC from FINRA:

SIPC is a non-profit organization created in 1970 under the Securities Investor Protection Act (SIPA) that provides limited coverage to investors on their brokerage accounts if their brokerage firm becomes insolvent. All brokerage firms that do business with the investing public are required to be members of SIPC. SIPC protection is limited. It covers the replacement of missing stocks and other securities up to $500,000, including $250,000 in cash claims. However, it does so only when a firm shuts down due to financial circumstances in which customer assets are missing—because of theft, conversion, or unauthorized trading—or are otherwise at risk because of the firm’s failure.

SIPC does not cover the following:

  • Ordinary market loss;
  • Investments in commodity futures, fixed annuities, currency, hedge funds or investment contracts (such as limited partnerships) that are not registered with the SEC; and
  • Accounts of partners, directors, officers or anyone with a significant beneficial ownership in the failed firm.

SIPC Moves Quickly & Makes Statement

The following was posted on the SIPC website on Monday:

WASHINGTON, D.C. – October 31, 2011 – The Securities Investor Protection Corporation (SIPC), which maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms, announced today that it is initiating the liquidation of MF Global Inc., under the Securities Investor Protection Act (SIPA).

SIPC today filed an application with the United States District Court for the Southern District of New York for a declaration that the customers of MF Global Inc. are in need of the protections available under the SIPA.

The United States District Court for the Southern District of New York granted the application and appointed James W. Giddens as trustee for the liquidation, and further appointed the law firm of Hughes Hubbard & Reed as counsel to Mr. Giddens.

Orlan Johnson, board chairman of the Securities Investor Protection Corporation (SIPC), said: “When the customers of a failed SIPC member brokerage firm have left their securities in the custody of that firm, SIPC acts as quickly as possible to protect those customers. In this case, SIPC initiated the liquidation proceeding within hours of being notified by the SEC that a SIPC case was necessary to protect the investing public.”

While the SIPC is not insuring the accounts, they are involved with helping investors.  The following press release discusses the SIPC’s involvement in helping investors to transfer accounts:

U.S. Bankruptcy Judge Martin Glenn approved a request to allow the transfer of certain segregated customer commodity positions from MF Global Inc. to one or more futures commission merchants (FCMs). The request was made by the trustee appointed by the Securities Investor Protection Corporation and oversee- ing the liquidation of MF Global Inc.

This action will allow for the transfer of approximately 50,000 client accounts, the substantial majority of which were cleared through the Chicago Mercantile Ex- change (CME). These transfers will unfreeze commodity positions with a notional value of $100 billion and represent a substantial position of all existing commod- ity accounts at MF Global Inc.

The notice above can be found on MF Global’s regulatory notices webpage.

Next Moves & Conclusion

Commodity pool operators who advise funds with accounts at MF Global should have already alerted investors in such funds.  For more information on this please see our post on the NFA Guidance re: MF Global.

Other persons who are interested in receiving more information about the liquidation and account transfer process should find the following websites helpful:

We will continue to provide updates on MF Global which we think will be helpful to our readers.  If you have specific questions, please feel free to send us questions and we will do our best to provide appropriate information through the blog.  As we mentioned above, we think that there is likely to some sort of regulatory fall-out from this and we believe that law makers will call for insurance for customer accounts.


Cole-Frieman & Mallon provides legal advice to FCMs, IBs, CTAs and CPOs.  Bart Mallon can be reached directly at 415-868-5345.

SEC releases statement on protection of customer assets

One of the major questions right now from both hedge fund investors and hedge fund managers is how safe are their assets.  I will be writing an article detailing the answer to this question over the next couple of days.

In the interim, the SEC has released a statement and so has FINRA.  I have posted a brief portion of the FINRA statement which can be found here.  I have also posted the entire SEC statement which can be found here.

FINRA Statement

In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm. Multiple layers of protection safeguard investor assets. For example, registered brokerage firms must keep their customers’ securities and cash segregated from their own so that, even if a firm fails, its customers’ assets will be safe. Brokerage firms are also required to meet minimum net capital requirements to reduce the likelihood of insolvency, and to be members of the Securities Investor Protection Corp (SIPC), which insures customer securities accounts up to $500,000. SIPC is used in those rare cases of firm failure where customer assets are missing because of theft or fraud. In other words, SIPC is the last course of action in the unlikely event that the other customer protections have failed.

SEC Statement

Statement of SEC Division of Trading and Markets Regarding the Protection of Customer Assets

Washington, D.C., Sept. 20, 2008 — The Securities and Exchange Commission’s Division of Trading and Markets today issued the following statement:

In recent days, Securities and Exchange Commission staff have received a number of questions from investors regarding the protection of their assets held by broker-dealers.

Customers of U.S. registered broker-dealers benefit from the extensive protections provided by the Commission rules, including the Customer Protection Rule, as well as protection by the Securities Investor Protection Corporation (SIPC). The Commission’s Customer Protection Rule requires a broker-dealer to segregate customer cash and securities from a broker-dealer’s own proprietary assets. More specifically, the rule requires that a broker-dealer keep customer cash and fully paid securities free of lien and in a safe location.

Any person who has deposited funds or securities in a securities account at a broker-dealer is a “customer” under the Customer Protection Rule. Securities customers of U.S. broker-dealers are not permitted to opt out of the protections afforded by the Customer Protection Rule. There is a technical exception for affiliates of the broker-dealer, but this exception would not affect the protections generally extended to a customer’s funds and securities deposited at the broker-dealer.

In addition to the Commission’s rules that protect securities customers, SIPC also protects securities customers up to $500,000 per customer, including a maximum of $100,000 for cash claims. To determine if your broker-dealer is a member of SIPC, or to learn more about the SIPC protections, you can check the SIPC website at www.sipc.org.