CASS 2.5 Use of a safe custody investment and stock lending1
Application1
A firm must not use a safe custody investment for its own account unless the client:
- (1)
if a private customer, has given prior written consent to the firm; or
- (2)
if an intermediate customer or market counterparty, has been notified by the firm.
Use of a safe custody investment: by another client
A firm must not use, for the account of one client, the safe custody investment of any other customer, unless that other customer:
- (1)
if a private customer, has given prior written consent to the firm; or
- (2)
if an intermediate customer, has been notified by the firm.
Stock lending
A firm must not undertake or otherwise engage in stock lending activity with or for a customer unless:
- (1)
- (2)
the stock lending activity is subject to appropriate terms and conditions.
- (1)
In the case of a private customer, the appropriate terms and conditions referred to in CASS 2.5.4 R(2) include those specified in COB 4 Annex 2(18) (Content of terms of business provided to a customer: stock lending).2
- (2)
Compliance with (1) may be relied upon as tending to establish compliance with CASS 2.5.4 R(2).
- (3)
Contravention of (1) may be relied upon as tending to establish contravention of with CASS 2.5.4 R(2).
Firms are reminded that the term "customer" does not include market counterparty.
To the extent that specific instructions are given by the customer, they are an important factor in assessing what terms and conditions are appropriate and should, in the absence of a reason not to do so, normally be followed. The specific requirements of the markets in which the lending takes place are another factor to be considered when assessing what terms and conditions are appropriate.
If a safe custody investment belonging to a private customer is used for stock lending activity, the firm must ensure that:
- (1)
relevant collateral is provided by the borrower in favour of the customer;
- (2)
the current realisable value of the safe custody investment and of the relevant collateral is monitored daily; and
- (3)
the firm provides relevant collateral to make up the difference where the current realisable value of the collateral falls below that of the safe custody investment, unless otherwise agreed in writing by the customer.
If safe custody investments of more than one customer are registered or otherwise held together, none of those safe custody investments may be used for a stock lending activity unless:
- (1)
all of those customers have consented to their safe custody investments being used for that activity; or
- (2)
the firm has adequate systems and procedures in place to ensure that only safe custody investments belonging to customers who have given their consent are used for stock lending activity.
Any cash or custody assets held in favour of a customer for stock lending activity must be held in accordance with the client money rules or custody rules.
The stock lending requirements in COB 4 Annex 2(18) also apply to safe custody investments held collectively on behalf of a firm's customers in any custody or settlement system. If the custody or settlement system operates an 'automatic' stock lending programme, the firm should maintain a separate account or be able to demonstrate that it maintains adequate systems to differentiate between the safe custody investments of those customers who have not consented to stock lending activity through that programme from the designated investments of those that have consented.2
A firm is expected to have documentation in place with borrowing counterparties which is adequate and appropriate having regard to the customers whose safe custody investments are being lent. The terms and conditions of lending should be appropriate to the markets in which lending takes place (for example by reference to the Stock lending and Repo Committee's Stock Borrowing and Lending Code of Guidance), and to the other circumstances of the transaction, in particular, the various types of risk involved in the transaction.
If a borrower is required to provide collateral (for example, to protect against settlement risk), the firm should consider whether it is appropriate to require this collateral be provided in advance of the stock lending activity. When making this decision the firm should consider all the circumstances of the transaction, including normal practice in the relevant market. The level and type of collateral required should take account of the credit-worthiness of the borrower and the market risks associated with the particular collateral.
Firms are reminded that dividends (actual or payments in lieu), stock lending fees and other payments received for the benefit of a customer, belong to the customer and should be held in accordance with the client money rules or custody rules as appropriate.