Federal Appeals Court Rules Brokerages Can Use Segregated Client Funds to Pay Creditors

A federal appeals court ruled Thursday that brokerages can use segregated client funds to pay off creditors in bankruptcy proceedings.
This essentially means that supposedly segregated customer funds are toast in the event of your brokerage’s bankruptcy.
The only way to remove your counter-party risk is to become your own central bank and hold your assets in your own personal possession.

A ruling in the case of failed futures brokerage Sentinel Management Group could make it more difficult for customers to recoup money lost in the much larger collapse of MF Global, according to Sentinel’s bankruptcy trustee.

A federal appeals court on Thursday upheld a ruling that puts Bank of New York Mellon ahead of former customers of Sentinel in the line of those seeking the return of money lost in the 2007 failure of the suburban Chicago-based futures broker.

The appeals court affirmed an earlier district court ruling that the bank had a “secured position” on a $312 million loan it gave to Sentinel, which turned out to have been secured by customer money.

Futures brokers are required to keep customers’ funds in dedicated accounts to protect them from being used for anything other than client business.

However, Thursday’s ruling suggests that brokerages can use customer funds to pay off other creditors, Sentinel trustee Fred Grede told Reuters.
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