This chapter4 (the client money rules) applies to a firm that receives money from 4or holds money for4, or on behalf of, a client in the course of, or in connection with:

1. (1)

   its designated investment business other than MiFID business4; or1

2. (2)

   1in the circumstances set out in CASS 4.1.1A R (4insurance mediation activity)4;

   4

1except where CASS 4.1.2 R applies.1

1A firm that receives or holds money to which this chapter4 applies and money in respect of which the insurance client money chapter4 applies, may elect to comply with the provisions of this chapter4 in respect of all such money and if it does so this chapter4 applies as if all such money were money that the firm receives and holds in the course of or in connection with its designated investment business.

This chapter does4 not apply with respect to:

1. (1)

   the permitted activities of a long-term insurer or a friendly society; or

2. (2)

   coins held on behalf of a client if the firm and the client have agreed that the money (or money of that type) is to be held by the firm for the intrinsic value of the metal which constitutes the coin; or

3. (3)

   money held by a firm which is an approved bank, but only when held in an account with itself, in which case the firm must notify the client in writing that:

   1. (a)

      money held for that client in an account with the approved bank will be held by the firm as banker and not as trustee (or in Scotland as agent); and

   2. (b)

      as a result, the money will not be held in accordance with the client money rules; or4

      1
4. (4)

   money held by depositaries to which chapter 11 (Trustee and depositary activities) of COB applied, or would have applied, on 31 October 20075; or4

   5
5. (5)

   1client money held by a firm which:

   1. (a)

      receives or holds client money in relation to contracts of insurance; but which

   2. (b)

      in relation to such client money elects to act in accordance with the insurance client money chapter; or4

      4
6. (6)

   client money held by a firm which:4

   1. (a)

      receives or holds client money in relation to designated investment business other than MiFID business; but which4

   2. (b)

      in relation to such client money elects to act in accordance with the MiFID client money chapter under the opt-in to that chapter (CASS 7.1.3 R5).4

1A firm should make and retain a written record of any election which it makes under CASS 4.1.1A R or CASS 4.1.2 R (5).

Subject to CASS 4.1.11 R, money is not client money when a firm (other than a sole trader) holds that money on behalf of, or receives it from, an eligible counterparty or a professional client4, other than in the course of insurance mediation activity, and the firm has obtained written acknowledgement from the eligible counterparty or professional client4 that:3

1. (1)

   the money will not be subject to the protections conferred by the client money rules;

2. (2)

   as a consequence, this money will not be segregated from the money of the firm in accordance with the client money rules and will be used by the firm in the course of its own business; and

3. (3)

   the eligible counterparty or professional client4 will rank only as a general creditor of the firm.

   4

Money is not client money if a firm, in respect of designated investment business which is not an investment service or activity, an ancillary service,4 a listed activity or insurance mediation activity:3

1. (1)

   holds it on behalf of or receives it from an eligible counterparty4 who is not an authorised person or a professional client4 who is not an authorised person; and

   44
2. (2)

   has sent a separate written notice stating the matters set out in CASS 4.1.9 R (1) to (3).

When a firm transfers client money to another person, the firm must not enter into an agreement under CASS 4.1.9 R or CASS 4.1.11 R with that other person in relation to that client money or represent to that other person that the money is not client money.

Money need not be treated as client money in respect of a delivery versus payment transaction through a commercial settlement system if it is intended that either:

1. (1)

   in respect of a client's purchase, money from a client will be due to the firm within one business day upon the fulfilment of a delivery obligation; or

2. (2)

   in respect of a client's sale, money is due to the client within one business day following the client's fulfilment of a delivery 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 investments by the client.

Money need not be treated as client money in respect of a delivery versus payment transaction, for the purpose of settling a transaction in relation to units in a regulated collective investment scheme, if:

1. (1)

   the authorised fund manager receives it from a client in relation to the authorised fund manager's obligation to issue units, in an AUT or to arrange for the issue of units in an ICVC, in accordance with CIS, unless the price of those units has not been determined by the close of business on the next business day:

   1. (a)

      following the date of the receipt of the money from the client; or

   2. (b)

      if the money was received by an appointed representative of the authorised fund manager, in accordance with CASS 4.3.15 R, following the date of receipt at the specified business address of the authorised fund manager; or

2. (2)

   the money is held in the course of redeeming units where the proceeds of that redemption are paid to a client within the time specified in CIS; when an authorised fund manager draws a cheque or other payable order within these timeframes the provisions of CASS 4.3.101 R and CASS 4.3.102 R will not apply.2

Money is not client money if the firm holds it on behalf of, or receives it from, an affiliated company, unless:

1. (1)

   the firm has been notified by the affiliated company that the money belongs to a client of the affiliated company; or

2. (2)

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

3. (3)

   the affiliated company is a manager of an occupational pension scheme or is an overseas company; and

   1. (a)

      the money is given to the firm in order to carry on designated investment business for or on behalf of the clients of the affiliated company; and

   2. (b)

      the firm has been notified by the affiliated company that the money is to be treated as client money.

Money is not client money when it becomes properly due and payable to the firm for its own account.

An authorised professional firm regulated by The Law Society (England and Wales), The Law Society of Scotland or The Law Society of Northern Ireland must comply with the rules of its designated professional body as specified in CASS 4.1.26 R, in force at commencement, and if it does so, it will be deemed to comply with CASS 4.1 to CASS 4.3.

For the purposes of CASS 4.1.25 R the relevant rules are:

1. (1)

   if regulated by the Law Society (of England and Wales):

   1. (a)

      the Solicitors' Accounts Rules 1998; or

   2. (b)

      where applicable, the Solicitors Overseas Practice Rules 1990;

2. (2)

   if regulated by the Law Society of Scotland, the Solicitors' (Scotland) Accounts, Accounts Certificate, Professional Practice and Guarantee Fund Rules 2001;

3. (3)

   if regulated by the Law Society of Northern Ireland, the Solicitors' Accounts Regulations 1998.

A trustee firm must hold any client money separate from its own money at all times.

Only the client money rules listed in COB 9.3.29 apply to a trustee firm in respect of client money held in the course of that trustee business.

CASS 4.2 applies in accordance with CASS 4.11

A firm (other than a firm acting in accordance with CASS 4.2.6 R) receives and holds client money as trustee (or in Scotland as agent) on the following terms:

1. (1)

   for the purposes of and on the terms of the client money rules and the client money distribution rules;

2. (2)

   subject to (3), for the clients for whom that money is held, according to their respective interests in it;

3. (3)

   on failure of the firm, for the payment of the costs properly attributable to the distribution of the client money in accordance with (2); and

4. (4)

   after all valid claims and costs under (2) and (3) have been met, for the firm itself.

A trustee firm:

1. (1)

   must receive and hold client money in accordance with the relevant instrument of trust;

2. (2)

   subject to that, receives and holds client money on trust on the terms (or in Scotland on the agency terms) specified in CASS 4.2.3 R.

CASS 4.3 applies in accordance with CASS 4.11

A firm must, except to the extent permitted by the client money rules, hold client money separate from the firm'smoney.

A firm may segregate client money in a different currency from that of receipt. If it does so, the firm must ensure that the amount held is adjusted each day to an amount at least equal to the original currency amount (or the currency in which the firm has its liability to its clients, if different), translated at the previous day's closing spot exchange rate.

A firm must not hold money other than client money in a client bank account unless it is:

1. (1)

   a minimum sum required to open the account, or to keep it open; or

2. (2)

   money temporarily in the account in accordance with CASS 4.3.13 R (Mixed remittance); or

3. (3)

   interest credited to the account which exceeds the amount due to clients as interest and has not yet been withdrawn by the firm.

If it is prudent to do so to ensure that client money is protected, a firm may pay into a client bank accountmoney of its own, and that money will then become client money for the purposes of the client money rules and the client money distribution rules.

A firm must segregate client money it receives using either:

1. (1)

   the approach detailed in CASS 4.3.10 R (the 'normal approach'); or

2. (2)

   the approach detailed in CASS 4.3.12 R (the 'alternative approach'), subject to:

   1. (a)

      written confirmation to the FSA from the firm's auditor that the firm has in place systems and controls which are adequate to enable it to operate the alternative approach effectively; and

   2. (b)

      the firm appointing a manager responsible for compliance with the client money rules.

If a firm receives and segregates client money, unless it adopts the alternative approach, it must, subject to CASS 4.1.15 R and CASS 4.1.16 R, CASS 4.3.11 R, CASS 4.3.13 R, CASS 4.3.15 R and CASS 4.3.21 R (delivery versus payment) either:

1. (1)

   pay it as soon as possible, and in any event no later than the next business day after receipt, into a client bank account; or

2. (2)

   pay it out in accordance with CASS 4.3.99 R.

If client money is received by the firm in the form of an automated transfer, the firm must take reasonable steps to ensure that:

1. (1)

   the money is received directly into a client bank account; and

2. (2)

   if money is received directly into the firm's own account, the money is transferred into a client bank account no later than the next business day after receipt.

Under the alternative approach, a firm receiving and segregating client money:

1. (1)

   is required to pay any money to or on behalf of clients out of its own account;

2. (2)

   is required to perform the segregation calculation contained in CASS 4.3.67 R, adjust the balance held in its client bank accounts and then segregate the money in the client bank account until the calculation is re-performed on the next business day;

3. (3)

   is not required to pay client money into a client bank account in accordance with any of CASS 4.3.10 R(1), CASS 4.3.11 R, CASS 4.3.13 R, CASS 4.3.15 R(1) and (2), CASS 4.3.21 R(1) and (2)(b) and CASS 4.3.24 R(1);

4. (4)

   may receive all client money into its own bank account;

5. (5)

   may choose to operate the alternative approach for some types of business (for example overseas equities transactions) and operate the normal approach for other types of business (for example contingent liability investments) if the firm can demonstrate that its systems and controls are adequate; and

6. (6)

   may use an historic average to account for uncleared cheques in accordance with CASS 4.3.69 G.

If a firm receives a mixed remittance (that is part client money and part other money), it must:

1. (1)

   pay the full sum into a client bank account in accordance with CASS 4.3.10 R(1); and

2. (2)

   pay the money that is not client money out of the client bank account within one business day of the day on which the firm would normally expect the remittance to be cleared.

A firm must establish and maintain procedures to ensure that client money received by its appointed representatives, field representatives or other agents is:

1. (1)

   paid into a client bank account of the firm in accordance with CASS 4.3.10 R(1); or

2. (2)

   forwarded to the firm, or in the case of a field representative forwarded to a specified business address of the firm, so as to ensure that the money arrives at the specified business address by the close of the third business day.

If client money is received in accordance with CASS 4.3.15 R, the firm must ensure that its appointed representative, field representative or other agent keeps client money separately identifiable from any other money (including that of the firm) until the client money is paid into a client bank account or sent to the firm.

A firm must take reasonable steps to ensure that it is notified promptly of any receipt of client money in the form of client entitlements.

When a firm receives a client entitlement on behalf of a client, it must pay any part of it which is client money:

1. (1)

   for client entitlements received in the United Kingdom, into a client bank account in accordance with CASS 4.3.10 R(1); or

2. (2)

   for client entitlements received outside the United Kingdom, into any bank account operated by the firm, provided that such client money is:

   1. (a)

      paid to, or in accordance with, the instructions of the client concerned; or

   2. (b)

      paid into a client bank account in accordance with CASS 4.3.10 R(1), as soon as possible but no later than five business days after the firm is notified of its receipt.

A firm must take reasonable steps to ensure that a client entitlement, which is client money, is allocated within a reasonable period of time after notification of receipt.

If a firm is liable to pay money to a client, it must as soon as possible, and no later than one business day after the money is due and payable:

1. (1)

   pay it into a client bank account, in accordance with CASS 4.3.10 R(1); or

2. (2)

   pay it to, or to the order of, the client.

Unless a firm notifies a retail client4 in writing whether or not interest is to be paid on client money and, if so, on what terms and at what frequency, it must pay that retail client4 all interest earned on that client money. Any interest due to a client will be client money.

A firm may allow another person, such as an exchange, a clearing house or an intermediate broker, to hold or control client money, but only if:

1. (1)

   the firm transfers the client money:

   1. (a)

      for the purpose of a transaction for a client through or with that person; or

   2. (b)

      to meet a client's obligation to provide collateral for a transaction (for example, an initial margin requirement for a contingent liability investment); and

2. (2)

   in the case of a retail client,4 that customer has been notified that the client money may be transferred to the other person.

   4

1. (1)

   A firm must ensure that, subject to CASS 4.3.30 R and CASS 4.3.40 R, client money is held in a client bank account at one or more approved banks.

2. (2)

   If the firm is a trustee firm, it must:

   1. (a)

      hold client money in a client bank account with an approved bank at all times; and

   2. (b)

      maintain separate client bank accounts for each trust.

A firm may open one or more client bank accounts in the form of a designated client bank account. Characteristics of these accounts are that:

1. (1)

   the account holds money of one or more clients;

2. (2)

   the account includes in its title the word 'designated';

3. (3)

   the clients whose money is in the account have each consented in writing to the use of the bank with which the client money is to be held; and

4. (4)

   in the event of the failure of that bank, the account is not pooled with any other type of account unless a primary pooling event occurs.

A firm may open one or more client bank accounts in the form of a designated client fund account. Characteristics of these accounts are that:

1. (1)

   the account holds at least part of the client money of one or more clients, each of whom has consented to that money being held in the same client bank accounts at the same banks (the client money of such clients constituting a designated fund);

2. (2)

   the account includes in its title the words 'designated fund'; and

3. (3)

   in the event of the failure of a bank with which part of a designated fund is held, each designated client fund account held with the failed bank will form a pool with any other designated client fund account containing part of that same designated fund unless a primary pooling event occurs.

A firm (other than a trustee firm) may hold client money with a bank that is not an approved bank if all of the following conditions are met:

1. (1)

   the client money relates to:

   1. (a)

      the settlement of a transaction, or a series of transactions; or

   2. (b)

      the distribution of income;

   subject to the law or market practice of a jurisdiction outside the United Kingdom;

2. (2)

   because of the applicable law or market practice of that overseas jurisdiction, it is not possible to hold the client money in a client bank account with an approved bank;

3. (3)

   the firm holds the money with such a bank for no longer than is necessary to effect the transaction, or series of transactions;

4. (4)

   the firm notifies each relevant eligible counterparty and professional client4 and obtains the prior written consent of each relevant retail client4 that:

   44
   1. (a)

      the client money will not be held with an approved bank;

   2. (b)

      in such circumstances, the legal and regulatory regime applying to the bank with which the client money is held will be different from that of the United Kingdom and, in the event of a failure of the bank, the client money may be treated differently from the treatment which would apply if the client money were held by an approved bank in the United Kingdom; and

   3. (c)

      if it is the case, the particular bank has not accepted that it has no right of set off or counterclaim against client money held, in respect of any sum owed by the firm on any other account held at that bank, as required by CASS 4.3.48 R; and

5. (5)

   the client money is held in a designated bank account.

Before a firm opens a client bank account and as often as is appropriate on a continuing basis (no less than once in each financial year), it must take reasonable steps to establish that the bank is appropriate for that purpose.

Subject to CASS 4.3.40 R, a firm that holds or intends to hold client money with a bank which is in the same group as the firm must:

1. (1)

   undertake a continuous review in relation to that bank which is at least as rigorous as the review of any bank which is not in the same group, in order to ensure that the decision to use a group bank is appropriate for the client or trust;

2. (2)

   disclose in writing to its client at the outset of the client relationship or, if later, not less than 20 business days before it begins to hold client money of that client with that bank:

   1. (a)

      that it is holding or intends to hold client money with a bank in the same group; and

   2. (b)

      the identity of the bank concerned.

If a client has notified a firm in writing that he does not wish his money to be held with a bank in the same group as the firm, the firm must either:

1. (1)

   place that client money in a client bank account with another bank in accordance with CASS 4.3.34 R; or

2. (2)

   return that client money to, or pay it to the order of, the client.

When a firm opens a client bank account, the firm must give or have given written notice to the bank requesting the bank to acknowledge to it in writing:

1. (1)

   that all money standing to the credit of the account is held by the firm as trustee (or if relevant, as agent) and that the bank is not entitled to combine the account with any other account or to exercise any right of set-off or counterclaim against money in that account in respect of any sum owed to it on any other account of the firm; and

2. (2)

   that the title of the account sufficiently distinguishes that account from any account containing money that belongs to the firm, and is in the form requested by the firm.

In the case of a client bank account in the United Kingdom, if the bank does not provide the acknowledgement referred to in CASS 4.3.48 R within 20 business days after the firm dispatched the notice, the firm must withdraw all money standing to the credit of the account and deposit it in a client bank account with another bank as soon as possible.

In the case of a client bank account outside the United Kingdom, if the bank does not provide the acknowledgement referred to in CASS 4.3.48 R within 20 business days after the firm dispatched the notice, the firm must notify the client of this fact as set out in CASS 4.3.56 R(3).

A firm which undertakes any contingent liability investment for clients through an exchange, clearing house, intermediate broker or OTC counterparty must, before the client transaction account is opened with the exchange, clearing house, intermediate broker or OTC counterparty:

1. (1)

   notify the person with whom the account is to be opened that the firm is under an obligation to keep client money separate from the firm's own money, placing client money in a client bank account;

2. (2)

   instruct the person with whom the account is to be opened that any money paid to it in respect of that transaction is to be credited to the firm'sclient transaction account; and

3. (3)

   require the person with whom the account is to be opened to acknowledge in writing that the firm'sclient transaction account is not to be combined with any other account, nor is any right of set-off to be exercised by that person against money credited to the client transaction account in respect of any sum owed to that person on any other account.

If the intermediate broker or OTC counterparty does not provide the acknowledgement required by CASS 4.3.52 R(3) within 20 business days of the dispatch of the notice and instruction, the firm must cease using the client transaction account with that broker or counterparty and arrange as soon as possible for the transfer or liquidation of any open positions and the repayment of any money.

If the exchange or clearing house does not provide the acknowledgement required by CASS 4.3.52 R(3) within 20 business days of the despatch of the notice and instruction, the firm must notify the client that a particular exchange or clearing house has not accepted that it has no right of set-off or counterclaim against money held in a client transaction account in respect of any sum owed on any other account of the firm, in that particular case or generally in an agreement entered into between the firm and its client.

A firm must not hold client money in a client bank account outside the United Kingdom, unless the firm has previously disclosed to the client in writing:

1. (1)

   that his money may be deposited in a client bank account outside the United Kingdom;

2. (2)

   that in such circumstances, the legal and regulatory regime applying to the approved bank will be different from that of the United Kingdom and, in the event of a failure of the bank, his money may be treated in a different manner from that which would apply if the client money was held by a bank in the United Kingdom; and

3. (3)

   if it is the case, that a particular bank has not accepted that it has no right of set-off or counterclaim against money held in a client bank account in respect of any sum owed on any other account of the firm, notwithstanding the firm's request to the bank as required by CASS 4.3.48 R.

If a client has notified a firm in writing before entering into a transaction that client money is not to be held in a particular jurisdiction, the firm must either:

1. (1)

   hold the client money in a client bank account in a jurisdiction to which the client has not objected; or

2. (2)

   return the client money to, or to the order of, the client.

A firm must not undertake any transaction for a client that involves client money being passed to an intermediate broker, settlement agent or OTC counterparty located in a jurisdiction outside the United Kingdom, unless the firm has previously disclosed in writing to the client:

1. (1)

   that his client money may be passed to a person outside the United Kingdom; and

2. (2)

   that, in such circumstances, the legal and regulatory regime applying to the intermediate broker, settlement agent or OTC counterparty will be different from that of the United Kingdom and, in the event of a failure of the intermediate broker, settlement agent or OTC counterparty, this money may be treated in a different manner from that which would apply if the money was held by an intermediate broker, settlement agent or OTC counterparty in the United Kingdom.

If a client has notified a firm before entering into a transaction that he does not wish his money to be passed to an intermediate broker, settlement agent or OTC counterparty located in a particular jurisdiction, the firm must either:

1. (1)

   hold the client money in a client bank account in the United Kingdom or a jurisdiction to which the client has not objected and pay its own money to the firm's own account with the broker, agent or counterparty; or

2. (2)

   return the money to, or to the order of, the client.

On the failure of a third party with which money is held, a firm must notify the FSA:

1. (1)

   as soon as it becomes aware of the failure of any bank, intermediate broker, settlement agent, OTC counterparty or other entity with which it has placed, or to which it has passed, client money; and

2. (2)

   as soon as reasonably practical, whether it intends to make good any shortfall that has arisen or may arise and of the amounts involved.

Each business day, a firm that adopts the normal approach in accordance with CASS 4.3.8 R must:

1. (1)

   check whether its client money resource, being the aggregate balance on the firm'sclient bank accounts, as at the close of business on the previous business day, was at least equal to the client money requirement, as defined in CASS 4.3.71 R, as at the close of business on that day; and

2. (2)

   ensure that:

   1. (a)

      any shortfall is paid into a client bank account by the close of business on the day the calculation is performed; or

   2. (b)

      any excess is withdrawn within the same time period unless CASS 4.3.5 R or CASS 4.3.6 R applies.

Each business day, a firm that adopts the alternative approach, in accordance with CASS 4.3.8 R, must ensure that its client money resource, being the aggregate balance on the firm's client bank accounts, as at the close of business on that business day is at least equal to the client money requirement, as defined in CASS 4.3.71 R, as at the close of business on the previous business day.

The client money requirement is either:

1. (1)

   (subject to CASS 4.3.85 R) the sum of, for all clients:

   1. (a)

      the individual client balances calculated in accordance with CASS 4.3.72 R, excluding:

      1. (i)

         individual client balances which are negative (that is, debtors); and

      2. (ii)

         clients' equity balances calculated in accordance with CASS 4.3.79 R; and

   2. (b)

      the total margined transaction requirement, calculated in accordance with CASS 4.3.81 R; or

2. (2)

   the sum of:

   1. (a)

      for each client bank account:

      1. (i)

         the amount which the firm's records show as held on that account; and

      2. (ii)

         an amount that offsets each negative net amount which the firm's records show attributed to that account for an individual client; and

   2. (b)

      the total margined transaction requirement, which is calculated in accordance with CASS 4.3.81 R.

The individual client balance for each client is calculated in accordance with CASS 4.3.73 R.

In CASS 4.3.72 R a firm must calculate the individual client balance using the contract value of any client purchases or sales.

A firm may choose to segregate designated investments instead of the value identified in CASS 4.3.73 R (except E1) if it ensures that the designated investments are held in such a manner that the firm cannot use them for its own purposes.

A firm's equity balance, whether with an exchange, intermediate broker or OTC counterparty, means the amount which the firm would be liable to pay to the exchange, intermediate broker or OTC counterparty (or vice versa) in respect of the firm'smargined transactions if each of the open positions of the firm's clients was liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and the firm's account with the exchange, intermediate broker or OTC counterparty is closed.

The total margined transaction requirement is:

1. (1)

   the sum of each of the client's equity balance4 which are positive;

   4

Less

1. (2)

   the proportion of any individual negative client equity balance4 which is secured by approved collateral; and

   4
2. (3)

   the net aggregate of the firm's equity balance (negative balances being deducted from positive balances) on transaction accounts for clients4 with exchanges, clearing houses, intermediate brokers and OTC counterparties.

   4

1. (1)

   When, in respect of a client, there is a positive individual client balance and a negative client equity balance,4 a firm may offset the credit against the debit and hence have a reduced individual client balance in CASS 4.3.72 R for that client.

   4
2. (2)

   When, in respect of a client, there is a negative individual client balance and a positive client equity balance,4 a firm may offset the credit against the debit and hence have a reduced client equity balance4 in CASS 4.3.81 R for that client.

   44

A firm must notify the FSA immediately if it is unable to, or does not, perform the daily calculation required by CASS 4.3.66 R or CASS 4.3.67 R.

A firm must notify the FSA immediately it becomes aware that it may not be able to make good any shortfall identified by CASS 4.3.66 R by the close of business on the day the calculation is performed.

A firm must perform a reconciliation of the client money balances which it holds, or for which it is responsible, as frequently as is necessary to ensure the accuracy of its record of money so held, and no less than once in every 25 business days.

A firm must complete the reconciliation of client money within ten business days of the date to which the reconciliation relates.

A firm must compare:

1. (1)

   the balance on each client bank account as recorded by the firm with the balance on that account as set out on the statement or other form of confirmation issued by the bank with which those accounts are held; and

2. (2)

   the balance, currency by currency, on each client transaction account as recorded by the firm, with the balance on that account as set out in the statement or other form of confirmation issued by the person with whom the account is held;

and identify any discrepancies between them.

Any approved collateral held in accordance with the client money rules must be included within this reconciliation.

When any discrepancy arises as a result of the reconciliation carried out under CASS 4.3.92 R, the firm must identify the reason for the discrepancy and correct it as soon as possible, unless the discrepancy arises solely as a result of timing differences between the accounting systems of the party providing the statement or confirmation and that of the firm.

While a firm is unable to resolve a difference arising from a reconciliation, and one record or a set of records examined by the firm during its reconciliation indicates that there is a need to have a greater amount of client money or approved collateral than is in fact the case, the firm must assume, until the matter is finally resolved, that the record or set of records is accurate and pay its own money into a relevant account.

A firm must notify the FSA as soon as possible if it is unable to comply with any of the requirements of CASS 4.3.89 R, CASS 4.3.91 R, CASS 4.3.92 R, CASS 4.3.94 R and CASS 4.3.95 R.

Money ceases to be client money if it is paid:

1. (1)

   to the client, or a duly authorised representative of the client; or

2. (2)

   to a third party on the instruction of the client, unless it is transferred to a third party in the course of effecting a transaction, in accordance with CASS 4.3.30 R; or

3. (3)

   into a bank account of the client (not being an account which is also in the name of the firm); or

4. (4)

   to the firm itself, when it is due and payable to the firm in accordance with CASS 4.1.19 R to CASS 4.1.24 G; or

5. (5)

   to the firm itself, when it is an excess in the client bank account as set out in CASS 4.3.66 R(2)(b).

When a firm draws a cheque or other payable order to discharge its fiduciary duty under CASS 4.3.99 R, it must continue to treat the sum concerned as client money until the cheque or order is presented and paid by the bank.

For the purposes of CASS 4.1.19 R, if a firm makes a payment to, or on the instructions of, a client, from an account other than a client bank account, until that payment has cleared, no equivalent sum from a client bank account for reimbursement will become due and payable to the firm.

A firm may cease to treat as client money any unclaimed client money balance if it can demonstrate that it has taken reasonable steps to trace the client concerned and to return the balance.

A firm with a Part 30 exemption order which also operates an LME bond arrangement for the benefit of US-resident investors, must exclude the client's equity balance4 for transactions undertaken on the London Metal Exchange on behalf of those US-resident investors from the calculation required by CASS 4.3.81 R.

A firm must not reduce the amount of, or cancel a letter of credit issued under, an LME bond arrangement where this will cause the firm to be in breach of its Part 30 exemption order.

A firm must notify the FSA immediately it arranges the issue of an individual letter of credit under an LME bond arrangement.

A firm must ensure that proper records, sufficient to show and explain the firm's transactions and commitments in respect of its client money, are made and retained for a period of three years after they were made.

CASS 4.4 (the client money distribution rules) applies to a firm that holds client money which is subject to the client money rules when a primary pooling event or a secondary pooling event occurs.

A primary pooling event occurs:

1. (1)

   on the failure of the firm; or

2. (2)

   on the vesting of assets in a trustee in accordance with an 'assets requirement' imposed under section 48(1)(b) of the Act; or

3. (3)

   on the coming into force of a requirement for all client money held by the firm; or

4. (4)

   when the firm notifies, or is in breach of its duty to notify, the FSA, in accordance with CASS 4.3.97 R, that it is unable correctly to identify and allocate in its records all valid claims arising as a result of a secondary pooling event.

CASS 4.4.5 R (4) does not apply so long as:

1. (1)

   the firm is taking steps, in consultation with the FSA, to establish those records; and

2. (2)

   there are reasonable grounds to conclude that the records will be capable of rectification within a reasonable period.

If a primary pooling event occurs:

1. (1)

   client money held in each client money account of the firm is treated as pooled; and

2. (2)

   the firm must distribute that client money in accordance with CASS 4.2.3 R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 4.3.85 R.

Client money received by the firm after a primary pooling event must not be pooled with client money held in any client money account operated by the firm at the time of the primary pooling event. It must be placed in a client bank account that has been opened after that event and must be handled in accordance with the client money rules, and returned to the relevant client without delay, except to the extent that:

1. (1)

   it is client money relating to a transaction that has not settled at the time of the primary pooling event; or

2. (2)

   it is client money relating to a client, for whom the client money entitlement, calculated in accordance with CASS 4.3.85 R, shows that money is due from the client to the firm at the time of the primary pooling event.

If a firm receives a mixed remittance after a primary pooling event, it must:

1. (1)

   pay the full sum into the separate client bank account opened in accordance with CASS 4.4.9 R; and

2. (2)

   pay the money that is not client money out of that client bank account into a firm's own bank account within one business day of the day on which the firm would normally expect the remittance to be cleared.

If both a primary pooling event and a secondary pooling event occur, the provisions of this section relating to a primary pooling event apply.

A secondary pooling event occurs on the failure of a third party to which client money held by the firm has been transferred under CASS 4.3.8 R or CASS 4.3.30 R.

CASS 4.4.20 R to CASS 4.4.32 R do not apply if, on the failure of the third party, the firm repays to its clients or pays into a client bank account, at an unaffected bank, an amount equal to the amount of client money which would have been held if a shortfall had not occurred at that third party.

If a secondary pooling event occurs as a result of the failure of a bank where one or more general client bank accounts are held, then:

1. (1)

   in relation to every general client bank account of the firm, the provisions of CASS 4.4.22 R and CASS 4.4.27 R to CASS 4.4.29 G will apply:

2. (2)

   in relation to every designated client bank account held by the firm with the failed bank, the provisions of CASS 4.4.24 R and CASS 4.4.27 R to CASS 4.4.29 G will apply;

3. (3)

   in relation to each designated client fund account held by the firm with the failed bank, the provisions of CASS 4.4.25 R and CASS 4.4.27 R to CASS 4.4.29 G will apply;

4. (4)

   any money held at a bank, other than the bank that has failed, in designated client bank accounts, is not pooled with any other client money; and

5. (5)

   any money held in a designated client fund account, no part of which is held by the bank that has failed, is not pooled with any other client money.

If a secondary pooling event occurs as a result of the failure of a bank where one or more designated client bank accounts or designated client fund accounts are held, then;

1. (1)

   in relation to every designated client bank account held by the firm with the failed bank, the provisions of CASS 4.4.24 R and CASS 4.4.27 R to CASS 4.4.29 G will apply; and

2. (2)

   in relation to each designated client fund account held by the firm with the failed bank, the provisions of CASS 4.4.25 R and CASS 4.4.27 R to CASS 4.4.29 G will apply.

Money held in each general client bank account and client transaction account of the firm must be treated as pooled and:

1. (1)

   any shortfall in client money held, or which should have been held, in general client bank accounts and client transaction accounts, that has arisen as a result of the failure of the bank, must be borne by all the clients whose client money is held in either a general client bank account or client transaction account of the firm, rateably in accordance with their entitlements;

2. (2)

   a new client money entitlement must be calculated for each client by the firm, to reflect the requirements in (1), and the firm's records must be amended to reflect the reduced client money entitlement;

3. (3)

   the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and

4. (4)

   the firm must use the new client entitlements, calculated in accordance with (2), when performing the daily client money calculation in accordance with CASS 4.3.65 G to CASS 4.3.85 R.

For each client with a designated client bank account held at the failed bank:

1. (1)

   any shortfall in client money held, or which should have been held, in designated client bank accounts that has arisen as a result of the failure, must be borne by all the clients whose client money is held in a designated client bank account of the firm at the failed bank, rateably in accordance with their entitlements;

2. (2)

   a new client money entitlement must be calculated for each of the relevant clients by the firm, and the firm's records must be amended to reflect the reduced client money entitlement;

3. (3)

   the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and

4. (4)

   the firm must use the new client money entitlements, calculated in accordance with (2), when performing the daily client money calculation, in accordance with CASS 4.3.65 G to CASS 4.3.85 R.

Money held in each designated client fund account with the failedbank must be treated as pooled with any other designated client fund accounts of the firm which contain part of the same designated fund and:

1. (1)

   any shortfall in client money held, or which should have been held, in designated client fund accounts that has arisen as a result of the failure, must be borne by each of the clients whose client money is held in that designated fund, rateably in accordance with their entitlements;

2. (2)

   a new client entitlement must be calculated for each client by the firm, in accordance with (1), and the firm's records must be amended to reflect the reduced client money entitlement;

3. (3)

   the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and

4. (4)

   the firm must use the new client money entitlements, calculated in accordance with (2), when performing the daily client money calculation in accordance with COB 9.3.99 to COB 9.3.119.

A client whose money was held, or which should have been held, in a designated client bank account with a bank that has failed is not entitled to claim in respect of that money against any other client bank account or client transaction account of the firm.

Client money received by the firm after the failure of a bank, that would otherwise have been paid into a client bank account at that bank:

1. (1)

   must not be transferred to the failed bank unless specifically instructed by the client in order to settle an obligation of that client to the failed bank; and

2. (2)

   must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:

   1. (a)

      on the written instruction of the client, transferred to a bank other than the one that has failed; or

   2. (b)

      returned to the client as soon as possible.

If a firm receives a mixed remittance after the secondary pooling event which consists of client money that would have been paid into a general client bank account, a designated client bank account or a designated client fund account maintained at the bank that has failed, it must:

1. (1)

   pay the full sum into a client bank account other than one operated at the bank that has failed; and

2. (2)

   pay the money that is not client money out of that client bank account within one business day of the day on which the firm would normally expect the remittance to be cleared.

If a secondary pooling event occurs as a result of the failure of an intermediate broker, settlement agent or OTC counterparty, then in relation to every general client bank account and client transaction account of the firm, the provisions of CASS 4.4.31 R and CASS 4.4.27 R to CASS 4.4.29 G will apply.

Money held in each general client bank account and client transaction account of the firm must be treated as pooled and:

1. (1)

   any shortfall in client money held, or which should have been held, in general client bank accounts and client transaction account, that has arisen as a result of the failure, must be borne by all the clients whose client money is held in either a general client bank account or a client transaction accounts of the firm, rateably in accordance with their entitlements;

2. (2)

   a new client money entitlement must be calculated for each client by the firm, to reflect the requirements of (1), and the firm's records must be amended to reflect the reduced client money entitlement;

3. (3)

   the firm must make and retain a record of each client's share of the client money shortfall at the failedintermediate broker, settlement agent or OTC counterparty until the client is repaid; and

4. (4)

   the firm must use the new client money entitlements, calculated in accordance with (2), when performing the daily client money calculation, in accordance with CASS 4.3.65 G to CASS 4.3.85 R.

Client money received by the firm after the failure of an intermediate broker, settlement agent or OTC counterparty, that would otherwise have been paid into a client transaction account at that intermediate broker, settlement agent or OTC counterparty:

1. (1)

   must not be transferred to the failed third party unless specifically instructed by the client in order to settle an obligation of that client to the failedintermediate broker, settlement agent or OTC counterparty; and

2. (2)

   must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:

   1. (a)

      on the written instruction of the client, transferred to a third party other than the one that has failed; or

   2. (b)

      returned to the client as soon as possible.

The provisions of CASS 4.3.64 R apply.