SIPC

The Securities Investor Protection Corporation (SIPC) is a nonprofit organization that protects brokerage customers if their broker-dealer fails financially. SIPC coverage protects up to $500,000 per customer (including up to $250,000 in cash) in the event that a brokerage firm goes bankrupt and customer assets are missing. SIPC does not protect against market losses — it protects against broker insolvency.

Why It Matters

When you deposit money and hold positions at a brokerage, you are trusting that firm to safeguard your assets. In the vast majority of cases, this trust is well-placed. But brokers can and do fail — MF Global in 2011 and Peregrine Financial in 2012 are recent examples. SIPC exists to ensure that if your broker goes under, you get your securities and cash back, up to the coverage limits.

For options traders who may hold significant account balances and complex positions, understanding SIPC coverage is important for evaluating where to keep your money and whether to spread assets across multiple brokers for additional protection.

How It Works

What SIPC covers:

• Stocks, bonds, and other securities held in your account
• Cash balances in your brokerage account
• Options positions (the contracts themselves are protected)
• Up to $500,000 total, including up to $250,000 in cash

What SIPC does NOT cover:

• Losses from market movements (your stocks going down)
• Losses from bad investment decisions
• Commodity futures contracts (these are covered by different protections)
• Cryptocurrency (in most cases)
• Investment advice that turned out to be wrong

How a SIPC liquidation works:

1. A brokerage firm fails and cannot return customer assets
2. SIPC steps in and appoints a trustee
3. The trustee determines what each customer is owed
4. Customer assets that can be identified are returned directly
5. For any shortfall (up to $500,000), SIPC advances funds from its reserve

Coverage per customer, not per account: SIPC protection is per customer at each brokerage firm. If you have a taxable account and an IRA at the same broker, each qualifies for separate coverage ($500,000 each) because they are considered different "customers." But two taxable accounts at the same broker may not get separate coverage.

Excess SIPC insurance: Many large brokerages carry additional insurance beyond SIPC limits through private insurers (often through Lloyd's of London). For example, some brokers offer $150 million or more in excess coverage. Check your broker's website for details.

How brokerages protect your assets: Under SEC rules, customer securities must be held in segregated accounts separate from the broker's own assets. This means that even without SIPC, your assets should be identifiable and recoverable in a bankruptcy. SIPC is the backstop when segregation fails or assets are misappropriated.

Quick Example

You have $300,000 in options positions and $100,000 in cash at Broker ABC, totaling $400,000. Broker ABC goes bankrupt due to fraud, and $100,000 of customer assets are missing.

SIPC steps in: your $300,000 in securities positions are identified in the broker's records and transferred to a new broker. The missing $100,000 is covered by SIPC (within the $250,000 cash limit and $500,000 total limit). You are made whole.

If you had $600,000 at the broker and $200,000 was missing, SIPC would cover up to $500,000 total — you would be $100,000 short. This is why traders with large accounts spread assets across multiple SIPC-member brokers or verify that their broker carries excess insurance.