CASS 6.1 Application

Firms are reminded that dividends (actual or payments in lieu), stock lending fees and other payments received for the benefit of a client, and which are due to the clients should be held in accordance with the MiFID client money chapter where appropriate.

This chapter does not apply where a firm issues depositary receipts. The custody rules in the non-directive custody chapter provide a specialist regime for the issue of depositary receipts (see CASS 2.1.24 R to CASS 2.1.26 R).

For example, this chapter does not apply where a firm borrows financial instruments from a client as principal under a stock lending agreement.

A title transfer financial collateral arrangement under the Financial Collateral Directive is a type of transfer of instruments to cover obligations where the financial instrument will not be regarded as belonging to the client.

Firms are reminded of the client's best interests rule, which requires them to act honestly, fairly and professionally in accordance with the best interests of their clients when structuring their business particularly in respect of the effect of that structure on firms' obligations under this chapter.

Firms are reminded that, in certain cases, the collateral rules apply where a firm receives collateral from a client in order to secure the obligations of the client.

The fact that a client is an affiliated company does not affect the operation of the custody rules in relation to that client.

A firm that holds financial instruments on behalf of an affiliated company in respect of its non-MiFID business and opts under CASS 6.1.17 R to comply with this chapter in respect of that non-MiFID business, should refer to CASS 2.1.9 R (1) to determine whether the assets falls within the scope of the custody rules in the non-directive custody chapter and therefore within the scope of the opt-in.

This chapter does not apply where a firm arranges registration of a financial instrument. In such circumstances, a firm must comply with the relevant custody rules in the non-directive custody chapter (see CASS 2.1.22 R).

This chapter does not apply where a firm recommends to a retail client a third party to hold the assets of that client. In such circumstances, a firm must comply with the relevant custody rules in the non-directive custody chapter (see CASS 2.2.19 R).

The custody rules do not apply if a firm temporarily handles a financial instrument belonging to a client. A firm should temporarily handle financial instrument for no longer than is reasonably necessary. In most transactions this would be no longer than one business day, but it may be longer or shorter depending upon the transaction in question. For example, when a firm executes an order to sell shares which have not been registered on a de-materialised exchange, handling documents for longer periods may be reasonably necessary. However, in the case of financial instruments in bearer form, the firm is expected to handle them for less than one business day. When a firm temporarily handlesfinancial instruments, it is still obliged to comply with Principle 10 (Clients' assets).

When a firm temporarily handles a financial instrument, in order to comply with its obligation to act in accordance with Principle 10 (Clients' assets), the following are guides to good practice:

1. (1)

   a firm should keep the financial instrument secure, record it as belonging to that client, and forward it to the client or in accordance with the client's instructions as soon as practicable after receiving it; and

2. (2)

   a firm should make and retain a record of the fact that the firm has handled that financial instrument and of the details of the client concerned and of any action the firm has taken.

A firm cannot rely upon this opt-in in respect of arranging safeguarding and administration of assets and depositary receipt business as the custody rules in the non-directive custody chapter provide specialised regimes in respect of these types of business which are outside the scope of this chapter.

If a firm has opted to comply with this chapter, the non-directive custody chapter will have no application to the activities to which the election applies.

A firm (other than a third country investment firm1) that is only subject to the non-directive custody chapter may not choose to comply with this chapter.

1The information requirements concerning the safeguarding of financial instruments belonging to a client (see COBS 6.1.7 R) apply to a firm that has elected to comply with this chapter with respect of all assets to which the election applies.

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 financial instruments for which it is responsible.

The rules in this chapter are designed primarily to restrict the commingling of client and the firm's assets and minimise the risk of the client's financial instruments 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.

The custody rules also implement the provisions of MiFID which regulate the obligations of a firm when it holds financial instruments belonging to a client.