Insurance gets thrown around in financial markets, but what it means depends on who’s talking. Retail traders often call anything that reduces loss “insurance,” even if that’s just hedging with puts or keeping cash on the sidelines. For professionals and risk officers, insurance means a legal contract sold by a regulated carrier—covering clearly defined operational or legal risks, subject to exclusions and limits, and always in exchange for a premium.

A separate but critical area: statutory schemes and regulatory protections for client money or custody. These are not policies you buy; they’re regulatory backstops that kick in during firm failures. They can help recover assets or cash up to set limits, but they’re not a guarantee against ordinary trading losses or every type of fraud.

This article separates these protection layers, explains what each actually covers, and looks at how traders and trading businesses can combine them to reduce exposures. The focus is practical: what traders and investors should expect from insurance, statutory protection, custody setups, and market hedges—plus the limits of each.

The article focuses on financial insurance. If you want to know how to further reduce risk through risk management, then I recommend that you visit the website DayTrading and read one of their many articles on the topic.

What Insurance in Markets Covers—and Doesn’t

Financial risk in markets falls into two broad types. First, market risk: the chance that prices move against your position and P&L turns negative. Second, operational and counterparty risk: brokers default, systems break, money disappears, or a third party fails in their obligations.

Insurance—at least as sold by regulated carriers—addresses the second category. Most policies exclude market risk entirely. They won’t reimburse losses from bad trades, strategy failures, price gaps, or volatility spikes. If you want to offset market moves, that’s what hedging tools like options, forwards, or swaps are for. Insurance policies focus on events like theft, fraud, cyber-attacks, or professional errors. The contract spells out what is and isn’t covered, with all sorts of limits and carve-outs.

Separate from private insurance are statutory compensation schemes and custody rules—usually a function of local law and regulation. These frameworks exist to protect clients when a regulated firm fails, but only under specific conditions. They do not prevent trading losses and rarely make investors whole on timing or full value.

Understanding the gap between market risk, operational risk, and statutory protection is step one. Actually managing that gap is the second and more crucial step.

Statutory Schemes, Custody, and Account-Level Protections

For individual traders, most of the protection you actually have comes down to statutory regimes, regulatory oversight, and custody arrangements. These cannot be “bought”; they are part of the infrastructure wherever your broker or custodian is regulated.

United States

Deposit insurance comes from the FDIC, but this only applies to bank deposits—not securities or investments. Brokerage accounts may be covered by the SIPC, which replaces missing cash or securities up to statutory limits if a member broker-dealer fails. SIPC is not a shield against bad trades, nor does it cover losses from price movements. It won’t protect you from a brokerage’s business model risk, investment performance, or legal problems unrelated to insolvency.

United Kingdom

The FSCS operates similar compensation for customers of authorized firms, with separate caps for deposits and investment accounts. UK regulatory rules—such as client asset segregation—require firms to separate client money from house funds, reducing the risk of client assets being seized by firm creditors in insolvency. But segregation is a procedural rule, not a cash payout or insurance guarantee.

Common Features and Limits

These statutory protections have hard caps. The amount per person, per firm, and per category (deposits vs. investments) is fixed. They only activate when certain triggers are hit (usually the insolvency of a member firm). They do not guarantee fast recovery and may not compensate for lost value during lengthy administration or price swings. They are claims processes, not instant bailouts.

Custody and Private Custodian Insurance

Large custodians sometimes carry private insurance against theft or internal fraud, but this is not always comprehensive. For instance, a policy might cover theft from a vault but exclude loss if a client’s login credentials are stolen. .

This article was last updated on: February 10, 2026