Reset to Today

To access the FCA Handbook Archive choose a date between 1 January 2001 and 31 December 2004.

Content Options:

Content Options

View Options:

Alternative versions

  1. Point in time
    2006-07-07

CASS 2.1 Custody

Application and purpose1

CASS 2.1.1 R

This section (the custody rules) apply to a firm when it is safeguarding and administering investments, subject to CASS 2.1.9 R.

CASS 2.1.2 G

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.

CASS 2.1.3 R

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.

CASS 2.1.4 G

The term 'client' refers to a market counterparty, intermediate customer or private customer. However, the term 'customer' does not include a market counterparty.

CASS 2.1.5 G

In 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. (1)

    providing a safe custody service in the United Kingdom; or

  2. (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.

CASS 2.1.6 G

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).

CASS 2.1.7 G

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.

CASS 2.1.8 G

The FSA has regulatory oversight for a UKfirm's custody activities in an EEAHost State; if a firm wishes to comply with an EEAHost State regime for regulating custody activities it should apply to the FSA for a waiver from the custody rules.

CASS 2.1.9 R

The custody rules do not apply to:

  1. (1)

    a firm when it safeguards and administers a designated investment on behalf of an affiliated company, unless:

    1. (a)

      the firm has been notified that the designated investment belongs to a client of the affiliated company; or

    2. (b)

      the affiliated company is a client dealt with at arm's length;

  2. (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. (3)

    a personal investment firm when it temporarily holds a designated investment, other than in bearer form, belonging to a client, if the firm:

    1. (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;

    2. (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

    3. (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.

CASS 2.1.10 G

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.

CASS 2.1.11 R

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

CASS 2.1.12 G

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'ssafe 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

CASS 2.1.13 R

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. (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. (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.

CASS 2.1.14 R

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'ssafe custody investment.

Modification of scope

CASS 2.1.15 G

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'ssafe 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

CASS 2.1.16 R

When a trustee firm or depositary acts as a custodian for a trust or collective investment scheme and

  1. (1)

    the trust or scheme is established by written instrument; and

  2. (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.

CASS 2.1.17 G

The reasonable steps referred in CASS 2.1.16 R(2) could include obtaining an appropriate legal opinion to that effect.

CASS 2.1.18 R

This table belongs to CASS 2.1.16 R.

Reference

Rule

CASS 2.1.1 R to CASS 2.1.12 G

Application

CASS 2.1.16 R to CASS 2.1.20 G

Trustees and depositaries

CASS 2.2.3 R to CASS 2.2.7 R

Segregation

CASS 2.2.10 R to CASS 2.2.12 G

Registration and recording

CASS 2.2.15 R (2) , CASS 2.2.16 G and CASS 2.2.17 R

Holding

CASS 2.5.4 R to CASS 2.5.10 R

Stocklending

CASS 2.6.2 R to CASS 2.6.14 R

Reconciliation

CASS 2.6.15 R to CASS 2.6.16 R

Records

CASS 2.1.19 R

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.

CASS 2.1.20 G

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

CASS 2.1.21 R
CASS 2.1.22 R

This table belongs to CASS 2.1.21 R.

Reference

Rule

CASS 2.1.1 R to CASS 2.1.12 G

Application

CASS 2.1.21 R to CASS 2.1.22 R

Arrangers

CASS 2.2.18 R , CASS 2.2.21 G to CASS 2.2.22 G

Assessment of custodian

CASS 2.3.7 R to CASS 2.3.9 G

Risk disclosures

CASS 2.6.15 R

Records

Depositary receipt business

CASS 2.1.23 G

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.

CASS 2.1.24 R

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:

CASS 2.1.25 R

This table belongs to CASS 2.1.24 R.

Reference

Rule

CASS 2.2.8 R

Segregation

CASS 2.2.23 R

Assessment of custodian

CASS 2.3.2 R to CASS 2.3.5 R

Client agreement

CASS 2.3.7 R to CASS 2.3.9 G

Risk disclosures

CASS 2.3.12 R to CASS 2.3.16 R

Production and despatch of statements

CASS 2.3.17 R to CASS 2.3.21 R

Content of client statements

CASS 2.1.26 R

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.

CASS 2.2 Segregation, registration and recording, and holding1

Application1

CASS 2.2.1 R

CASS 2.2 applies in accordance with CASS 2.11

CASS 2.2.2 G

The rules governing the segregation, registration or recording, and holding of a client'ssafe custody investments require a clear distinction to be maintained, to the extent practicable, between safe custody investment held for the clients and those designated investments held for the firm.

General

CASS 2.2.3 R

A firm must segregate safe custody investments from its own designated investments except to the extent required by law or permitted by the custody rules.

CASS 2.2.4 G

A firm which is a trustee is bound in relation to safe custody investments by the terms of its trust and applicable law and CASS 2.2.3 R does not modify those obligations.

CASS 2.2.5 R

A firm must ensure that if a safe custody investment is recorded in an account with itself, the title of that account makes it clear that the safe custody investment belongs to a client, and is segregated from the firm'sdesignated investments.

CASS 2.2.6 G

CASS 2.2.5 R refers to the firm's own records.

CASS 2.2.7 R

A firm must require that if a safe custody investment is recorded in an account with a custodian, the custodian makes it clear in the title of the account that the safe custody investment belongs to one or more clients of the firm.

Affiliated companies

CASS 2.2.8 R

If a firm holds a designated investment on behalf of an affiliated company, it must not hold that designated investment in the same account as a safe custody investment (of a client who is not an affiliated company) unless CASS 2.1.9 R(1) (Application) applies, and consequently, the firm is applying the custody rules to that investment.

Registration and recording: purpose

CASS 2.2.9 G

The registration and recording rules are designed to safeguard and secure a client's entitlement. The rules are not in order of priority and firms are expected to register and record the legal title of a safe custody investment in such a manner as to provide the client with appropriate protection.

CASS 2.2.10 R

To the extent practicable, a firm must effect appropriate registration or recording of legal title to a safe custody investment in the name of:

  1. (1)

    the client (or where appropriate, the trustee firm), unless the client is an authorised person acting on behalf of its client, in which case it may be registered in the name of the client of that authorised person;

  2. (2)

    a nominee company which is controlled by:

    1. (a)

      the firm;

    2. (b)

      an affiliated company;

    3. (c)

      a recognised investment exchange or designated investment exchange;

    4. (d)

      a custodian;

  3. (3)

    a custodian if:

    1. (a)

      the safe custody investment is subject to the law or market practice of a jurisdiction outside the United Kingdom and the firm has taken reasonable steps to determine that it is in the client's best interests to register or record it in that way, or that it is not feasible to do otherwise, because of the nature of the applicable law or market practice; and

    2. (b)

      the firm has notified the client in writing;

  4. (4)

    the firm if:

    1. (a)

      the safe custody investment is subject to the law or market practice of a jurisdiction outside the United Kingdom and the firm has taken reasonable steps to determine that it is in the client's best interests to register or record it in that way, or that it is not feasible to do otherwise, because of the nature of the applicable law or market practice; and

    2. (b)

      the firm has notified the client in accordance with CASS 2.3.10 R (Risk disclosures) if a market counterparty or an intermediate customer, or obtained his prior written consent if a private customer; or

  5. (5)

    any other person, in accordance with the client's specific written instruction, provided:

    1. (a)

      the firm complies with CASS 2.3.11 R (Risk disclosures); and

    2. (b)

      in the case of a private customer, the other person is not an associate of the firm.

CASS 2.2.11 G

If the client in CASS 2.2.10 R(1) is an authorised person and the safe custody investments belong to clients of that authorised person, it is the responsibility of that authorised person to ensure that the registering or recording is appropriate for the client concerned.

CASS 2.2.12 G

A firm that applies CASS 2.2.10 R (3) or (4) will be expected to demonstrate that adequate investigations have been made of the market concerned by reference to local sources which may include appropriate legal opinion.

CASS 2.2.13 R

A firm may register or record legal title to its own designated investment in the same name as that in which legal title to a safe custody investment is registered or recorded, but only if:

  1. (1)

    the firm'sdesignated investments are separately identified in the firm's records from safe custody investment; or

  2. (2)

    the firm registers or records a safe custody investment in accordance with CASS 2.2.10 R(4).

Holding: purpose

CASS 2.2.14 G

The following rules are designed to provide an appropriate level of protection for a safe custody investment which the firm physically holds. A firm should ensure that the arrangements for holding any document of title to a safe custody investment are appropriate to the value and risk of loss of the safe custody investment concerned, and that there are adequate controls designed to safeguard it from damage, misappropriation or other loss.

CASS 2.2.15 R

A firm must hold any document of title to a safe custody investment either in the physical possession of the firm or:

  1. (1)

    for a private customer, with a custodian in an account designated for clients' safe custody investments;

  2. (2)

    for a market counterparty or intermediate customer, with one or more of the following:

    1. (a)

      a custodian in an account designated for clients' safe custody investment;

    2. (b)

      any person whom the firm has taken reasonable steps to determine is a person whose business includes the provision of appropriate safe custody services; or

    3. (c)

      subject to CASS 2.3.11 R (Risk disclosures) in accordance with the market counterparty's or intermediate customer's specific written instructions.

CASS 2.2.16 G

In CASS 2.2.15 R reasonable steps may include on the basis of an appropriate legal opinion obtained by the firm or another person.

CASS 2.2.17 R

A firm must ensure that any documents of title to designated investments in bearer form, belonging to the firm and which it holds in its physical possession, are kept separately from any document of title to a client's safe custody investment in bearer form.

Assessment of a custodian

CASS 2.2.18 R

Before a firm holds a safe custody investment with a custodian or arranges registration of a safe custody investment through a custodian, it must undertake an appropriate risk assessment of that custodian.

CASS 2.2.19 R

Before a firm recommends a custodian to a private customer, it must undertake an appropriate risk assessment of that custodian.

CASS 2.2.20 G

A firm that holds safe custody investments with a custodian or recommends custodians to private customers, is expected to establish and maintain a system for assessing the appropriateness of its selection of the custodian and to assess the continued appointment of that custodian periodically as often as is reasonable in the relevant market. In order to comply with SYSC 3.2.20 R (Records), the firm is also expected to make and retain a record of the grounds on which it satisfies itself as to the appropriateness of its selection or, following a periodic assessment, continued appropriateness of the custodian.

CASS 2.2.21 G

In undertaking an appropriate risk assessment of the custodian in accordance with CASS 2.2.18 R and CASS 2.2.19 R, firms might take into account any or all of the following matters:

  1. (1)

    the expertise and market reputation of the custodian, and, once a safe custody investment has been lodged by the firm with the custodian, the custodian's performance of its services to the firm;

  2. (2)

    the arrangements for holding and safeguarding an investment;

  3. (3)

    an appropriate legal opinion as to the protection of custody assets in the event of the insolvency of the custodian;

  4. (4)

    current industry standard reports, for example Financial reporting and auditing group (FRAG) 21 report or its equivalent;

  5. (5)

    whether the custodian is regulated and by whom;

  6. (6)

    the capital or financial resources of the custodian;

  7. (7)

    the credit rating of the custodian;

  8. (8)

    any other activities undertaken by the custodian and, if relevant, any affiliated company.

CASS 2.2.22 G

In undertaking the risk assessment of a custodian, a firm should have regard to all relevant circumstances including legal requirements and custodial practices, in the relevant jurisdiction. For example, if the legal requirements of a jurisdiction in which the firm proposes to hold a safe custody investment with a custodian, makes it mandatory to use a particular custodian for that purpose, then the FSA will regard this fact alone as justifying the use of that custodian. If the use of that custodian is a matter of custodial practice in that jurisdiction, the custodian is likely to be appropriate for that purpose subject to the firm checking whether following that practice is appropriate for the client's purposes. In both circumstances, the firm will still be under a duty to ensure the continued appropriateness of the custodian, taking account of the current legal requirements and custodial practice of that jurisdiction.

CASS 2.2.23 R

Before a firm holds a custody asset with a custodian which is in the same group as the firm, it must inform the client in writing that it intends to do so.

CASS 2.3 Client agreement and client statements1

Application1

CASS 2.3.1 R

CASS 2.3 applies in accordance with CASS 2.11

CASS 2.3.2 R

Before a firm provides safe custody services to a client, unless CASS 2.3.5 R applies, the firm must notify the client as to the appropriate terms and conditions which apply to this service, including, where applicable, those covering:

  1. (1)

    registration of the safe custody investments if these will not be registered in the client's name;

  2. (2)

    the extent of the firm's liability in the event of a default by a custodian, except that a firm must accept the same level of responsibility to its client for any nominee company controlled by the firm or by its affiliated company as for itself and may not disclaim responsibility for losses arising directly from the fraud, wilful default or negligence of the firm;

  3. (3)

    the circumstances in which the firm may realise a safe custody investment held as collateral to meet the client's liabilities (see COB 7.8) (Realisation of a private customer's assets).

  4. (4)

    claiming and receiving dividends, interest payments and other entitlements accruing to the client;

  5. (5)

    dealing with takeovers, other offers or capital reorganisations and exercising voting, conversion and subscription rights;

  6. (6)

    arrangements for the distribution of entitlements to shares and any other benefits arising from corporate events, where clients' balances have been pooled;

  7. (7)

    arrangements for the provision of information to the client relating to the safe custody investment which the firm, or its nominee company, holds on behalf of the client;

  8. (8)

    how often a statement of custody assets will be sent to the client and the basis on which assets shown on the statement are valued;

  9. (9)

    fees and costs for safe custody services to the extent that they are not notified to the client elsewhere; and

  10. (10)

    if the firm intends to pool a safe custody investment with that of one or more other clients, notification of its intention to the market counterparty or intermediate customer and if the client is a private customer, an explanation of the effects of pooling to that private customer.

CASS 2.3.3 G

When explaining the meaning of pooling to a private customer, firms are expected to advise the private customer that:

  1. (1)

    individual entitlements may not be identifiable by separate certificates, other physical documents or equivalent electronic record; and

  2. (2)

    in the event of an unreconcilable shortfall after the failure of a custodian, clients may share in that shortfall in proportion to their original share of the assets in the pool.

CASS 2.3.4 R

Unless CASS 2.3.5 R or CASS 2.3.6 R applies, the firm must obtain the written agreement of a private customer, or notify a market counterparty or an intermediate customer, as to:

  1. (1)

    the arrangements for the giving and receiving of instructions by or on behalf of the client in respect of the safe custody service which is to be provided, including, if applicable, the arrangements for the giving of authority by the client to another person and the extent of that authority and any limitation on it; and

  2. (2)

    any lien or security interest taken over a safe custody investment by the firm or a third party, except in respect of any charges relating to the administration or safekeeping of the safe custody investments;

CASS 2.3.5 R

A firm need not obtain the written agreement or give notice as required by CASS 2.3.4 R, or give notice to a client in accordance with CASS 2.3.2 R, if the firm has no intention of providing a safe custody service to the client but unintentionally holds a safe custody investment for the client as a result of circumstances that could not reasonably have been foreseen by the firm.

CASS 2.3.6 R
  1. (1)

    A firm need not obtain the written agreement of a private customer, or give notice to a market counterparty or an intermediate customer, as required by CASS 2.3.4 R if:

    1. (a)

      the client is ordinarily resident outside the United Kingdom;

    2. (b)

      the firm has taken reasonable steps to determine that the client does not wish to execute that agreement; and

    3. (c)

      the firm makes and retains a record of those steps and their results.

  2. (2)

    For a firm acting as an outgoing ECA provider, the exemption in (1) applies only if the client is ordinarily resident outside the EEA.

Risk disclosures

CASS 2.3.7 R

Before holding or arranging for another person or firm to hold a customer'ssafe custody investment overseas, a firm must notify the customer in writing that there may be different settlement, legal and regulatory requirements in overseas jurisdictions from those applying in the United Kingdom, or such jurisdiction as is appropriate in the circumstances, and that there may be different practices for the separate identification of safe custody investments.

CASS 2.3.8 G

The term "customer" does not include a market counterparty.

CASS 2.3.9 G

It is intended that the application of CASS 2.3.7 R be appropriate to the circumstance, so for example, a European branch of a UK firm which provides services to customers in the country where the branch is located may adapt the risk disclosure required by CASS 2.3.7 R to suit the particular circumstances applicable to that branch and customer.

CASS 2.3.10 R

Before a firm registers or records legal title to a safe custody investment in the name of the firm, it must notify the client if a market counterparty or an intermediate customer, and obtain his prior written consent if the client is a private customer, that:

  1. (1)

    the safe custody investment will or may be registered or recorded in the firm's name;

  2. (2)

    as a result the safe custody investment may not be segregated from the designated investments of the firm; and

  3. (3)

    in the event of the failure of the firm, the client's assets may not be as well protected from claims made on behalf of the general creditors of the firm.

CASS 2.3.11 R

If a client has instructed the firm on the holding, registration or recording of a safe custody investment under CASS 2.2.10 R(5) (Registration and recording) or CASS 2.2.15 R(2)(c) (Holding) the firm must notify the client that the consequences of doing so are at the client's own risk, unless the firm has agreed otherwise.

Production and despatch of client statements

CASS 2.3.12 R

A firm must, as often as necessary or as often as agreed with its client, but in any event not less frequently than annually, provide to each client, or to a representative nominated by the client in writing, a statement prepared in accordance with CASS 2.3.17 R (Content of client statements) unless:

  1. (1)

    the account of a client for whom a custody asset has been held at any time during the firm's financial year has been closed; and

  2. (2)

    the firm has sent the client a closing statement which shows that the firm no longer holds any custody asset for the client .

CASS 2.3.13 R

Statements must be provided in accordance with CASS 2.3.12 R within 25 business days of the date as at which the statement is made.

CASS 2.3.14 R
  1. (1)

    A firm may, with the client's prior written agreement, retain statements required to be sent to a client who is ordinarily resident outside the United Kingdom.

  2. (2)

    For a firm acting as an outgoing ECA provider, the exemption in (1) applies only if the client is ordinarily resident outside the EEA.

CASS 2.3.15 G

The statements referred to in CASS 2.3.14 R may be retained either electronically or in hard copy. Wherever possible responsibility within a firm for such statements should be given to an employee or department not otherwise involved with that client.

CASS 2.3.16 R

If a firm provides a range of safe custody services for a private customer which result in statements being generated from more than one system, it must ensure that all the statements in respect of those services are produced as at the same date and despatched within one week of each other, unless each statement makes clear that it relates to a particular service.

Content of client statements

CASS 2.3.17 R

All statements produced by or on behalf of a firm in accordance with CASS 2.3.12 R - CASS 2.3.14 R and CASS 2.3.16 R, must list all custody assets held for the client for which the firm is accountable and:

  1. (1)

    identify any safe custody investment registered in the client's own name separately from those registered in any other name;

  2. (2)

    identify any custody assets which are being used as collateral or have been pledged to third parties, separately from any other custody assets;

  3. (3)

    show the market value of any collateral held, as at the date of the statement; and

  4. (4)

    for a private customer, base the statement on either trade date or settlement date information for cash balances and safe custody investment and notify the basis to the private customer.

CASS 2.3.18 R

A firm may include the information required by CASS 2.3.17 R in any statement provided by the firm to the client in accordance with COB 8.2 (Periodic statements), or by other separate documents, as long as they are prepared in relation to the same date and delivered to the client within a reasonable period of one another.

CASS 2.3.19 R

A statement under CASS 2.3.17 R must include client money unless this has been included in a statement separately despatched to the client within one month before or after the statement date.

CASS 2.3.20 G

CASS 2.3.19 R refers to the client money balance as at the statement date for each client.

CASS 2.3.21 R

A safe custody investment need not be included in a statement if a client transaction has been carried out within the previous three months and the firm does not intend to offer a safe custody service in relation to the safe custody investment.

CASS 2.4 Custodian agreement1

Application1

CASS 2.4.1 R

CASS 2.4 applies in accordance with CASS 2.11

CASS 2.4.2 R

Before a firm holds a safe custody investment for or on behalf of a client with a custodian, it must agree in writing appropriate terms and conditions with the custodian, including, where applicable:

  1. (1)

    that the title of the account indicates that any safe custody investment credited to it does not belong to the firm or to an affiliated company that is not being treated as an arm's length client in accordance with CASS 2.1.9 R(1)(b) (Application));

  2. (2)

    that the custodian will hold or record a safe custody investment belonging to the firm'sclient (or where the firm is a trustee firm, the trustees), separately from any designated investment belonging to the firm or to the custodian;

  3. (3)

    that the custodian will deliver to the firm a statement as at a date or dates specified by the firm which details the description and amounts of all the safe custody investments credited to the account;

  4. (4)

    that the custodian will not claim any lien, right of retention or sale over any safe custody investment standing to the credit of any account set up in accordance with (1) except:

    1. (a)

      where the firm has notified the custodian in writing that the client has provided written consent; or

    2. (b)

      in respect of any charges relating to the administration or safekeeping of the safe custody investment;

  5. (5)

    the arrangements for registration or recording of the safe custody investment if this will not be registered in the client's name;

  6. (6)

    that the custodian is not to permit withdrawal of any safe custody investment from the account except for delivery to the firm or on the firm's instructions;

  7. (7)

    the procedures and authorities for the passing of instructions to or by the firm;

  8. (8)

    the claiming and receiving of dividends, interest payments and other entitlements accruing to the client; and

  9. (9)

    the extent of the custodian's liability in the event of the loss of a safe custody investment caused by the fraud, wilful default or negligence of the custodian, or an agent appointed by him.

CASS 2.4.3 G

Firms should seek to ensure that custodians deliver the statement referred to in CASS 2.4.2 R(3) to the firm within 20 business days of the date of the statement.

CASS 2.4.4 G

Firms need not include in the custodian agreement, any of the provisions set out in CASS 2.4.2 R if, for example, the firm or custodian is unable to comply with the provision on account of legal requirements or custodial practice imposed on or by a securities depository or clearance system.

CASS 2.5 Use of a safe custody investment and stock lending1

Application1

CASS 2.5.1 R

CASS 2.5 applies in accordance with CASS 2.11

CASS 2.5.2 R

A firm must not use a safe custody investment for its own account unless the client:

  1. (1)

    if a private customer, has given prior written consent to the firm; or

  2. (2)

    if an intermediate customer or market counterparty, has been notified by the firm.

Use of a safe custody investment: by another client

CASS 2.5.3 R

A firm must not use, for the account of one client, the safe custody investment of any other customer, unless that other customer:

  1. (1)

    if a private customer, has given prior written consent to the firm; or

  2. (2)

    if an intermediate customer, has been notified by the firm.

Stock lending

CASS 2.5.4 R

A firm must not undertake or otherwise engage in stock lending activity with or for a customer unless:

  1. (1)

    the firm has obtained the consent of the customer; and

  2. (2)

    the stock lending activity is subject to appropriate terms and conditions.

CASS 2.5.5 E
  1. (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. (2)

    Compliance with (1) may be relied upon as tending to establish compliance with CASS 2.5.4 R(2).

  3. (3)

    Contravention of (1) may be relied upon as tending to establish contravention of with CASS 2.5.4 R(2).

CASS 2.5.6 G

Firms are reminded that the term "customer" does not include market counterparty.

CASS 2.5.7 G

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.

CASS 2.5.8 R

If a safe custody investment belonging to a private customer is used for stock lending activity, the firm must ensure that:

  1. (1)

    relevant collateral is provided by the borrower in favour of the customer;

  2. (2)

    the current realisable value of the safe custody investment and of the relevant collateral is monitored daily; and

  3. (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.

CASS 2.5.9 R

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. (1)

    all of those customers have consented to their safe custody investments being used for that activity; or

  2. (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.

CASS 2.5.10 R

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.

CASS 2.5.11 G

The stock lending requirements in COB 4 Annex 2(18) also apply to safe custody investments held collectively on behalf of a firm'scustomers 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

CASS 2.5.12 G

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.

CASS 2.5.13 G

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.

CASS 2.5.14 G

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.

CASS 2.6 Operation1

Application1

CASS 2.6.1 R

CASS 2.6 applies in accordance with CASS 2.11

CASS 2.6.2 R

A firm must, as often as is necessary, but no less than every 25 business days, perform a reconciliation of its record of safe custody investments for which it is accountable but which it does not physically hold, with statements obtained from custodians, and in the case of dematerialised safe custody investments not held through a custodian, statements obtained from the person who maintains the record of legal entitlement.

CASS 2.6.3 G

Information about client holdings obtained from, for example CREST, in respect of dematerialised safe custody investments may be used to comply with CASS 2.6.2 R.

CASS 2.6.4 R

If a firm is unable to obtain no less than every 25 business days, statements of clients' entitlement from unittrust manager, operators of ICVCs or administrators of offshore mutual funds, it need perform a reconciliation of the client's unit trusts, ICVCs and offshore mutual funds holdings only as often as the statements are received but no less than every 6 months.

CASS 2.6.5 G

When a firm relies on CASS 2.6.4 R the FSA will still expect the firm to make reasonable efforts to obtain statements on a monthly basis.

CASS 2.6.6 R

A firm must, as often as is necessary, but no less than every 6 months (or twice in a period of 12 months but at least 5 months apart), carry out:

  1. (1)

    a count of all safe custody investments it physically holds on behalf of clients and reconcile the result of that count with its record of safe custody investments that it physically holds on behalf of its clients; and

  2. (2)

    a reconciliation between the firm's record of client holdings, and the firm's record of the location of safe custody investments.

CASS 2.6.7 G

Whenever possible, a firm should ensure that reconciliations are carried out by a person (for example an employee of the firm) who is independent of the production or maintenance of the records to be reconciled.

CASS 2.6.8 R

A firm must perform the reconciliation in CASS 2.6.6 R as soon as reasonably practicable after the date to which the reconciliation relates.

CASS 2.6.9 G

Firms will normally be expected to perform the reconciliation in CASS 2.6.6 R within 25 business days of the date to which the statements relate.

Reconciliation methods

CASS 2.6.10 R

The reconciliation referred to in CASS 2.6.6 R must cover all safe custody investments recorded in the firm's books and records and those of any nominee company which the firm uses for the provision of safe custody services and is controlled by the firm or by an affiliated company, and must be performed by:

  1. (1)

    the 'total count method', which requires that all safe custody investments be counted and reconciled as at the same date; or

  2. (2)

    an alternative reconciliation method (for example the rolling stock method) provided that:

    1. (a)

      all of a particular safe custody investment are counted and reconciled as at the same date;

    2. (b)

      all safe custody investments are counted and reconciled during a period of six months; and

    3. (c)

      written confirmation is given to the FSA from the firm's auditor that the firm has in place systems and controls which enable it to adequately perform the alternative method of reconciliation which the firm proposes to use.

Reconciliation discrepancies

CASS 2.6.11 R

A firm must promptly correct any discrepancies which are revealed, and make good, or provide the equivalent of, any unreconciled shortfall for which there are reasonable grounds for concluding that the firm is responsible.

CASS 2.6.12 G

Items recorded or held within a suspense or error account fall within the scope of discrepancies.

CASS 2.6.13 G

A firm may, where justified, conclude that another person is responsible for an irreconcilable shortfall despite the existence of a dispute with that other person about the unreconciled item. In those circumstances, the firm is not required to make good the shortfall but is expected to take reasonable steps to resolve the position with the other person.

Notification requirement

CASS 2.6.14 R

A firm must inform the FSA in writing without delay:

  1. (1)

    if it has not complied with, or is unable, in any material respect, to comply with the reconciliation requirements in CASS 2.6.2 R, CASS 2.6.4 R, CASS 2.6.6 R, CASS 2.6.8 R and CASS 2.6.10 R; or

  2. (2)

    if having carried out a reconciliation it is unable, in any material respect, to comply with CASS 2.6.11 R.

Records

CASS 2.6.15 R

A firm must ensure that proper records of the custody assets which it holds or receives, or arranges for another to hold or receive, on behalf of the client, are made and retained for a period of 3 years after they are made.

CASS 2.6.16 R

A firm that uses a safe custody investment in stock lending activity must ensure that its records identify which safe custody investments are available to be lent, and which have been lent.