CASS 6.1 Application

2The regulated activity of safeguarding and administering investments covers both the safeguarding and administration of assets (without arranging) andarranging safeguarding and administration of assets,5 when those assets are either safe custody investments or custody assets. A safe custody investment is, in summary, a designated investment which 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 a client.5

2In 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.

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,2 should be held in accordance with the client money chapter where appropriate.

For example, this chapter does not apply where a firm borrows safe custody assets 2 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.

3A prime brokerage firm is reminded of the additional obligations in CASS 9.3.1 R which apply to prime brokerage agreements.

The fact that a client is an affiliated company in respect of MiFID business2 does not affect the operation of the custody rules in relation to that client.

2In respect of business which is not MiFID business, the custody rules do not apply to a firm when it safeguards and administers a designated investment on behalf of an affiliated company, unless:

1. (1)

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

2. (2)

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

The custody rules do not apply if a firm temporarily handles a safe custody asset 2 belonging to a client. A firm should temporarily handle a safe custody asset 2 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 safe custody assets 2 in bearer form, the firm is expected to handle them for less than one business day. When a firm temporarily handles safe custody assets,2 it is still obliged to comply with Principle 10 (Clients' assets).

When a firm temporarily handles a safe custody asset,2 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 safe custody asset 2 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. (2)

   a firm should make and retain a record of the fact that the firm has handled that safe custody asset 2 and of the details of the client concerned and of any action the firm has taken.

   2

7The custody rules do not apply to a firm that is managing an AIF or managing a UCITS in relation to activities which are carried on by that firm in connection with, or for the purposes of, managing the AIF or UCITS.

2Administrative convenience alone should not lead a personal investment firm to rely on CASS 6.1.16C R. Personal investment firms should consider what is in the client's interest and not rely on CASS 6.1.16C R as a matter of course.

2The reasonable steps referred in CASS 6.1.16FR (2) could include obtaining an appropriate legal opinion to that effect.

2A trustee firm or depositary that just arranges safeguarding and administration of assets may also take advantage of the exemption in CASS 6.1.16J R (Arrangers).

7Firms acting as trustee or depositary of an AIF are reminded of the obligations in FUND 3.11 (Depositaries) and Chapter IV (Depositary) of the AIFMD level 2 regulation which apply in addition to those in CASS 6.

7A firm (Firm A) to which another firm acting as trustee or depositary of an AIF (Firm B) has delegated safekeeping functions in line with FUND 3.11.25R (Delegation: safekeeping) will not itself be acting as trustee or depositary of an AIF for that AIF. CASS 6.1.16IA R will not apply to Firm A in respect of that AIF. However, Firm A may be safeguarding and administering investments in respect of that AIF.

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 assets 2 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 safe custody assets 2 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, where relevant,2 implement the provisions of MiFID which regulate the obligations of a firm when it holds financial instruments belonging to a client in the course of its MiFID business.2