CASS 2.1 Custody
Application and purpose1
This chapter2 (the custody rules) applies2 to a firm when it is safeguarding and administering investments other than:2
222- (1)
when it is holding financial instruments belonging to a client in the course of conducting MiFID business; or2
- (2)
in the circumstances set out in CASS 2.1.9 R.2
The regulated activity of safeguarding and administering investments covers both the safeguarding and administration of assets (without arranging) and arranging the safeguarding and administration of assets, when those assets are either safe custody investments or custody assets. A safe custody investment is, in summary, a designated investment that a firm receives or holds on behalf of a client. Custody assets include designated investments, and any other assets that the firm holds or may hold in the same portfolio as a designated investment held for or on behalf of the client.
2The MiFID custody chapter applies when a firm holds financial instruments belonging to a client in the course of its MiFID business.
Firms must apply the custody rules to those custody assets which are not safe custody investment in a manner appropriate to the nature and value of those custody assets.
The term 'client' refers to an eligible counterparty2, a professional client or a retail client2. However, the term 'customer' does not include an eligible counterparty2.
222In accordance with article 42 of the Regulated Activities Order, a firm ("I") will not be arranging safeguarding and administration of assets if it introduces a client to another firm whose permitted activities include the safeguarding and administration of investments, or to an exempt person acting as such, with a view to that other firm or exempt person:
- (1)
providing a safe custody service in the United Kingdom; or
- (2)
arranging for the provision of a safe custody service in the United Kingdom by another person;
and the other firm, exempt person or other person who is to provide the safe custody service is not in the same group as I, and does not remunerate I.
Firms are reminded that, under CASS 1.3.3 R, the custody rules do not apply to an incoming EEA firm, other than an insurer, with respect to its passported activities. The application of the custody rules to the activity of a firm is also dependent on the location from which the activity is undertaken (see CASS 1.3.2 R).
The Home State regulator of an incoming EEA firm has regulatory oversight for that firm's custody activities; if an EEA firm wishes to comply with the custody rules it should apply to its Home State regulator for permission to do so.
The FSA has regulatory oversight for a UK firm's custody activities in an EEA Host State; if a firm wishes to comply with an EEA Host State regime for regulating custody activities it should apply to the FSA for a waiver from the custody rules.
The custody rules do not apply to:
- (1)
a firm when it safeguards and administers a designated investment on behalf of an affiliated company, unless:
- (a)
the firm has been notified that the designated investment belongs to a client of the affiliated company; or
- (b)
the affiliated company is a client dealt with at arm's length;
- (a)
- (2)
a firm, when it acts as the operator of a regulated collective investment scheme, in relation to activities carried on for the purpose of, or in connection with, the operation of the scheme;
- (3)
a personal investment firm when it temporarily holds a designated investment, other than in bearer form, belonging to a client, if the firm:
- (a)
keeps it secure, records it as belonging to that client, and forwards it to the client or in accordance with the client's instructions, as soon as practicable after receiving it;
- (b)
retains the designated investment for no longer than the firm has taken reasonable steps to determine is necessary to check for errors and to receive the final document in connection with any series of transactions to which the documents relate; and
- (c)
makes a record, which must then be retained for a period of 3 years after the record is made, of all the designated investments handled in accordance with (3)(a) and (b) together with the details of the clients concerned and of any action the firm has taken;2
2
- (a)
- (4)
a MiFID investment firm or a third country investment firm 3that has opted to act in accordance with the MiFID custody chapter in respect of designated investments that it safeguards and administers which are subject to the opt-in to the MiFID custody chapter.2
Administrative convenience alone should not lead a personal investment firm to rely on CASS 2.1.9 R(3). Personal investment firms should consider what is in the client's interest and not rely on CASS 2.1.9 R(3) as a matter of course.
2Firms that safeguard and administer designated investments including financial instruments and that are subject to both sets of custody rules, should refer to CASS 6.1.17 R (Opt-in to the MiFID custody rules) which3 contains provisions3 enabling these firms to opt to comply solely with the MiFID custody chapter. This is also relevant to the equivalent business of a third country investment firm.3
A firm must accept the same level of responsibility to its client for any nominee company controlled by the firm in respect of any requirements of the custody rules.
General purpose
Principle 10 (Clients' assets) requires a firm to arrange adequate protection for clients' assets when it is responsible for them. As part of these protections, the custody rules require a firm to take appropriate steps to protect safe custody investments for which it is responsible. The rules are designed primarily to restrict the commingling of client and firm's assets and minimise the risk of the client's safe custody investments being used by the firm without the client's agreement or contrary to the client's wishes, or being treated as the firm's assets in the event of its insolvency.
Delivery versus payment transactions
A designated investment need not be treated as a safe custody investment in respect of a delivery versus payment transaction through a commercial settlement system if it is intended that the designated investment is either to be:
- (1)
in respect of a client's purchase, due to the client within one business day following the client's fulfilment of a payment obligation; or
- (2)
in respect of a client's sale, due to the firm within one business day following the fulfilment of a payment obligation;
unless the delivery or payment by the firm does not occur by the close of business on the third business day following the date of payment or delivery of the designated investment by the client.
Until a transaction of the type described in CASS 2.1.13 R settles, a firm may segregate money (in accordance with the client money rules) instead of the client's safe custody investment.
Modification of scope
It is not necessary to apply the full range of the custody rules to all types of firm. For example, certain firms already have extensive obligations imposed on them under the general law with regard to the correct treatment of client's safe custody investment. Likewise the full range of the rules is not appropriate for a firm that only arranges safe custody services for its clients. Consequently, the rules provide for appropriate differentiation of scope and application of the rules.
Trustees and depositaries
When a trustee firm or depositary acts as a custodian for a trust or collective investment scheme and
- (1)
the trust or scheme is established by written instrument; and
- (2)
the trustee firm or depositary has taken reasonable steps to determine that the relevant law and provisions of the trust instrument or scheme constitution will provide protections at least equivalent to the custody rules for the trust property or scheme property,
the trustee firm or depositary need comply only with the custody rules listed in CASS 2.1.18 R.
The reasonable steps referred in CASS 2.1.16 R(2) could include obtaining an appropriate legal opinion to that effect.
This table belongs to CASS 2.1.16 R.
Reference |
Rule |
Application |
|
Trustees and depositaries |
|
Segregation |
|
Registration and recording |
|
Holding |
|
Stocklending |
|
Reconciliation |
|
Records |
When a trustee firm or depositary within CASS 2.1.16 R arranges for or delegates the provision of safe custody services by or to another person, the trustee firm or depositary must also comply with CASS 2.2.18 R,CASS 2.2.23 R (Assessment of a custodian), CASS 2.3.7 R (Risk disclosure) and CASS 2.4.2 R (Custodian agreement) in addition to the custody rules listed in CASS 2.1.18 R.
A trustee firm or depositary that just arranges safeguarding and administration of assets may also take advantage of the exemption in CASS 2.1.21 R (Arrangers).
Arrangers
Only the custody rules in CASS 2.1.22 R apply to a firm when arranging safeguarding and administration of assets.
This table belongs to CASS 2.1.21 R.
Reference |
Rule |
Application |
|
Arrangers |
|
Assessment of custodian |
|
Risk disclosures |
|
Records |
Depositary receipt business
For firms that issue depositary receipts, the underlying security is held for the benefit of the depositary receipt holder. Clients for whom depositary receipts are held will be known to the firm and will have the necessary agreements in place. However, other persons who purchase depositary receipts in the secondary market will not be known to the firm until after they become clients. Consequently, firms that issue depositary receipts will accordingly not be able to comply with certain custody rules.
Firms that hold securities, which are represented by depositary receipts or documents which have the characteristics of depositary receipts and these receipts or documents entitle the holders to all dividends and other rights given by the underlying securities held by the firm, need not comply with the rules listed in CASS 2.1.25 R in respect of clients who acquire the depositary receipts in the secondary market:
This table belongs to CASS 2.1.24 R.
Reference |
Rule |
Segregation |
|
Assessment of custodian |
|
Client agreement |
|
Risk disclosures |
|
Production and despatch of statements |
|
Content of client statements |
When a firm arranges safeguarding and administration of assets in respect of depositary receipts, it need not comply with CASS 2.3.7 R (risk disclosures) for that business.