If your broker were to fail, your account positions and balances would be transferred to another clearing firm. The process takes some time, but ultimately you can anticipate getting your money back. The SIPC has done this 317 times, and a little over 99% of investors involved have been paid what they were owed.

Exchange Trade Futures Accounts

If you own a futures account, things get a little more complicated but not by much.

Your futures account is actually separated and designated to your sole benefit. This means it cannot be attacked in a bankruptcy or receivership process. Ultimately, the account and your open positions are transferred to another clearing firm where you can access it.

Recently, this happened to the futures account holders at Refco. There is no upper limit on how much you can have in your account for this kind of coverage.

Forex Dealers

If you have an over-the-counter forex account of any kind, you are typically out of luck if your dealer fails.

Forex dealers do not segregate accounts (especially outside the U.S.) in the same way a futures broker does, and it can be attacked in a bankruptcy. This is what happened recently to traders with forex accounts at Refco. This makes it even more important to be very picky about who you trade with and to have more than one account.

Find out more about diversifying your dealer here.

Why Does This Matter?

If you have a single uncovered account or partially uncovered account and your broker or dealer fails, it doesn't matter how profitable you have been — its gone.

Over the last year, we have learned that no bank or financial institution can be considered immune to sudden and catastrophic failure. There have been 57 bank failures in the U.S. over the last 12 months — marque names like Lehman, Bear Stearns and Citigroup have lost all or most of their value and Standard and Poors has lost their rating credibility. This is a new market, and nothing should be taken for granted.

Your homework is to call your brokers and/or dealer and find out exactly how you are covered and what you need to do to improve that coverage. Don't get burned by ignorance. Take action now to make sure your exposure is reduced.

This article is brought to you by LearningMarkets.com.

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