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CASS 6.1 Application

CASS 6.1.1RRP

This chapter (the custody rules) applies to: 1

  1. (1)

    a MiFID investment firm:1

    1. (a)

      when it holds financial instruments belonging to a client in the course of its MiFID business; or1

    2. (b)

      that opts to comply with the custody rules under this chapter in accordance with CASS 6.1.17R (1)1 (Opt-in to the MiFID custody rules); and1

  2. (2)

    a third country investment firm that opts to comply with the custody rules under this chapter in accordance with CASS 6.1.17R (2) (Opt-in to the MiFID client money rules). 1

CASS 6.1.2GRP

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.

CASS 6.1.3G

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).

Business in the name of the firm

CASS 6.1.4RRP

The custody rules do not apply where a firm carries on business in its name but on behalf of the client where that is required by the very nature of the transaction and the client is in agreement.

[Note: recital 26 to MiFID]

CASS 6.1.5GRP

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

Title transfer collateral arrangements

CASS 6.1.6RRP

The custody rules do not apply where a client transfers full ownership of a financial instrument to a firm for the purpose of securing or otherwise covering present or future, actual, contingent or prospective obligations.

[Note: recital 27 to MiFID]

CASS 6.1.7G

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.

CASS 6.1.8GRP

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.

CASS 6.1.9GRP

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.

Affiliated companies

CASS 6.1.10GRP

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

CASS 6.1.11G

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.

Delivery versus payment transactions

CASS 6.1.12RRP
  1. (1)

    A firm need not treat this chapter as applying in respect of a delivery versus payment transaction through a commercial settlement system if it is intended that the financial instrument is either to be:

    1. (a)

      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. (b)

      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 financial instrument by the client.

  2. (2)

    Until such a delivery versus payment transaction through a commercial settlement system settles, a firm may segregate money (in accordance with the MiFID client money chapter ) instead of the client's financial instruments.

Arranging registration and recommendations

CASS 6.1.13G

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).

CASS 6.1.14G

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).

Temporary handling of financial instruments

CASS 6.1.15GRP

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).

CASS 6.1.16GRP

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.

Opt-in to the MiFID custody rules

CASS 6.1.17R
  1. (1)

    A firm that holds financial instruments to which this chapter applies and assets in respect of which the non-directive custody chapter applies, may elect to comply with the provisions of this chapter in respect of all assets so held and if it does so, this chapter applies as if all such assets were financial instruments that the firm receives and holds in the course of, or in connection with, its MiFID business.

  2. (1A)

    A third country investment firm that holds designated investments belonging to a client in the course of its equivalent business may elect to comply with the provisions of this chapter in respect of the assets it holds to which the non-directive custody chapter applies. If it does so, this chapter applies as if all such assets were assets that the firm receives and holds in the course of, or in connection with, MiFID business.1

  3. (2)

    An election under this rule must be in respect of all the activities of the firm when it is safeguarding and administering investments belonging to a client with the exception of arranging safeguarding and administration of assets within the scope of CASS 2.1.21 R and CASS 2.1.22 R and depositary receipt business within the scope of CASS 2.1.24 R to CASS 2.1.26 R.

  4. (3)

    A firm must make and retain a written record of the election it makes under this rule, including the date from which the election is to be effective. The firm must make the record on the date it makes the election and must keep it for a period of five years after ceasing to use it.

CASS 6.1.18G

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.

CASS 6.1.19G

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.

CASS 6.1.20G

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.

CASS 6.1.20AG

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. 2

Disposal of financial instruments

CASS 6.1.21R

The custody rules cease to have effect in relation to a financial instrument it has been disposed of in accordance with a valid client instruction.

General purpose

CASS 6.1.22GRP

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.

CASS 6.1.23GRP

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.

CASS 6.1.24GRP

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.