This chapter2 (the custody rules) applies2 to a firm when it is safeguarding and administering investments other than:2

1. (1)

   when it is holding financial instruments belonging to a client in the course of conducting MiFID business; or2

2. (2)

   in the circumstances set out in CASS 2.1.9 R.2

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 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;2

      2
4. (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

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.

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.

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.

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.

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.

Only the custody rules in CASS 2.1.22 R apply to a firm when arranging safeguarding and administration of assets.

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:

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 applies in accordance with CASS 2.11

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.

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.

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.

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.

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 an eligible counterparty3 or a professional client3, or obtained his prior written consent if a retail client3; or

      333
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 retail client3, the other person is not an associate of the firm.

      3

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).

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 retail client3, with a custodian in an account designated for clients' safe custody investments;

   3
2. (2)

   for an eligible counterparty3 or a professional client3, with one or more of the following:

   33
   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 eligible counterparty's3 or professional client's3 specific written instructions.

      33

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.

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.

Before a firm recommends a custodian to a retail client3, it must undertake an appropriate risk assessment of that custodian.

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 applies in accordance with CASS 2.11

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 CASS 2.3.2A R3);

   3
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 eligible counterparty or professional client2 and if the client is a retail client2, an explanation of the effects of pooling to that retail client2.

    222

3A firm must not realise a retail client's assets unless it is legally entitled to do so and it has either:

1. (1)

   set out in a client agreement provided to the retail client:

   1. (a)

      the action it may take to realise any assets of the retail client;

   2. (b)

      the circumstances in which it may do so; and

   3. (c)

      each asset (if relevant) or type or class of asset over which it may exercise the right; or

2. (2)

   give the retail client notice (oral or written) of its intention to exercise its rights at least three business days before it does so.

Unless CASS 2.3.5 R or CASS 2.3.6 R applies, the firm must obtain the written agreement of a retail client2, or notify an eligible counterparty or a professional client2, 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;

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.

1. (1)

   A firm need not obtain the written agreement of a retail client2, or give notice to an eligible counterparty or a professional client2, as required by CASS 2.3.4 R if:

   22
   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.

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.

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 an eligible counterparty or a professional client2, and obtain his prior written consent if the client is aretail client2, 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.

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.

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 .

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.

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.

If a firm provides a range of safe custody services for a retail client2 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.

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 retail client2, base the statement on either trade date or settlement date information for cash balances and safe custody investment and notify the basis to the retail client2.

   22

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 the rules on periodic reporting in COBS 16.33, 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.

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.

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 applies in accordance with CASS 2.11

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 2.5 applies in accordance with CASS 2.11

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

1. (1)

   if a retail client3, has given prior written consent to the firm; or

   3
2. (2)

   if a professional client or eligible counterparty3, has been notified by the firm.

   3

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 retail client3, has given prior written consent to the firm; or

   3
2. (2)

   if a professional client3, has been notified by the firm.

   3

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, which includes a provision that, in the case of a retail client, the firm may undertake stock lending with or for the retail client (if that is the case), specifying the assets to be lent, the type and value of the relevant collateral from the borrower and the method and amount of payment due to the retail client in respect of the lending4.

If a safe custody investment belonging to a retail client3 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.

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.

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 2.6 applies in accordance with CASS 2.11

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.

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.

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.

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.

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.

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.

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.

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.

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.