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An exchange protection fund is a jurisdiction-specific compensation scheme, not a universal insurance policy. Depending on local rules, it may compensate eligible customers when a covered securities firm or intermediary fails and cannot return qualifying assets. It generally does not reimburse ordinary investment losses such as a falling share price or an issuer’s failure to repay a bond.
What an exchange protection fund is designed to protect
The name can refer to different schemes established under different laws. Their rules define the event that triggers compensation, who qualifies, which firms and assets are covered, and how any payment is calculated. The relevant fund is the one tied to the jurisdiction and legal entity that holds your account—not a global fund that automatically protects every investor.
A common purpose is to provide a backstop when a covered intermediary fails and eligible customer cash or securities cannot be returned. This is distinct from protecting the value of an investment. For example, a fund may address missing customer property after a firm’s insolvency while excluding losses caused by a security falling in price.
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How asset segregation differs from compensation
Asset segregation and a compensation fund are separate safeguards. In Japan, securities firms must keep customer assets separate from their own. If that separation works, customers’ assets should ordinarily be returnable even if the firm fails. Japan’s Investor Protection Fund (JIPF) is a backstop for qualifying cash or securities that cannot be returned in the specified failure situation.
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That distinction matters: the existence of a fund does not mean every customer automatically receives a payment whenever a brokerage closes. The scheme’s trigger and the circumstances of the missing assets must meet its rules.
Japan: what the JIPF says it covers
JIPF says it can compensate eligible customers when a member securities firm becomes insolvent and qualifying customer cash or securities cannot be returned. Its stated maximum is up to ¥10 million per customer. This is a Japan-specific limit, not a general limit for exchange protection funds elsewhere. See the JIPF Q&A for its explanation of coverage.
JIPF lists examples of relevant activity that include shares, public and corporate bonds, investment trusts, certain margin-trading deposits, and specified clearing margins for eligible domestic exchange-traded derivatives. Eligibility also depends on the customer, regulated business, and transaction. The Q&A says professional investors—including financial institutions and government bodies—are not eligible as “general customers.”
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Compensation is paid in cash, even when the missing asset is a security. For listed securities, JIPF says it uses the closing price on the day it publicly announces compensation. Amounts the customer owes the failed firm are deducted. These rules mean payment is not necessarily equal to the customer’s original purchase price.
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Losses the cited schemes do not generally cover
JIPF expressly excludes losses unrelated to a failure to segregate and return customer assets. Its examples include:
- A security losing market value.
- An issuer failing to pay interest or principal.
- A loss caused by a securities firm’s false or misleading explanation.
JIPF’s calculation is based on the eligible security’s value under its rules, not the difference between the purchase price and that value. Its Q&A also lists exclusions such as foreign-exchange transactions, over-the-counter derivatives, derivatives traded on overseas securities exchanges, certain exchange currency-related transactions, and certain Type II Financial Instruments Business products such as collective investments. A firm’s membership alone does not establish that every customer, account, product, or transaction is protected.
If a JIPF-eligible customer’s unreturned assets exceed the compensation limit, the excess is not automatically erased: the customer retains a claim against the failed firm. Any recovery through insolvency proceedings depends on what assets remain.
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Hong Kong’s Investor Compensation Company says its Investor Compensation Fund covers pecuniary losses suffered by investors of any nationality as a result of a licensed intermediary’s or authorized financial institution’s default in relation to exchange-traded products in Hong Kong. It also identifies qualifying losses involving certain Shanghai or Shenzhen exchange securities routed through the northbound Stock Connect link, for defaults on or after 1 January 2020. The company is the recognized administrator that receives, determines, and pays claims. Details are on the Investor Compensation Fund introduction page.
That description should not be treated as equivalent to Japan’s rules. The cited Hong Kong page does not establish all current eligibility, calculation, or claims-process details, so check the fund’s current detailed rules rather than applying JIPF’s limit or exclusions to Hong Kong.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What to check before relying on a fund
Confirm the rules with the official scheme and the precise legal entity holding your account. Compare these points:
Quick Recap
- Failure trigger: What legally defined default or inability to return assets qualifies?
- Investor eligibility: Are professional investors, particular customer types, or non-residents excluded?
- Intermediary: Is the firm a member or otherwise covered, and is your account held with the covered legal entity?
- Property and activity: Which cash, securities, products, markets, and transaction types qualify?
- Excluded losses: Are market declines, issuer defaults, FX, over-the-counter derivatives, overseas activity, or misrepresentation outside scope?
- Limit and calculation: Is the cap per customer, account, firm, or event, and what valuation date, deductions, and currency apply?
- Claims process: Who determines that a qualifying failure occurred, when claims open, what deadline applies, and what recourse remains for amounts above the cap?
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