Security segregation


Security segregation, in the context of the securities industry, refers to regulatory rules requiring that customer assets held by a financial institution be held separate from assets of the brokerage firm itself in a segregated account.
Thus, for example, in the United States the law generally requires that a broker must take steps to hold separately, in separate to limit the broker's use of customer securities to support the broker's own business activities; and b) to facilitate the prompt return of customer securities in the event of the broker's insolvency. In many jurisdictions segregated accounts cannot be used to pay creditors during a liquidation and must be returned to the customers directly.
This securities segregation requirement was developed due to problems in the U.S. stock markets towards the end of the 1960s. At the time, there was not any requirement that brokers segregate client securities from the firm's own assets on the firm's books and records. When brokers went bankrupt, therefore, they were unable to return securities to their clients, inasmuch as they had not maintained accurate books and records of their clients' holdings.