CASS 6.1 Application

This chapter (the custody rules) applies to a firm:2 1

1. (1)

   [deleted]2

   2
   1. (a)

      [deleted]2

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   2. (b)

      [deleted]2

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2. (1A)

   2when it holds financial instruments belonging to a client in the course of its MiFID business;

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3. (1B)

   2when it is safeguarding and administering investments, in the course of business that is not MiFID business;7

4. (1C)

   when it is acting as trustee or depositary of an AIF; 7

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5. (1D)

   when it is acting as trustee or depositary of a UCITS; and9 7

6. (1E)

   in respect of any arrangement for a client to transfer full ownership of a safe custody asset to the firm which is:

   1. (a)

      in the course of, or in connection with, the firm's designated investment business; and

   2. (b)

      for the purpose of securing or otherwise covering present or future, actual or contingent or prospective obligations, but the application of the custody rules to a firm under this paragraph is limited to the rules and guidance in CASS 6.1.6 R to CASS 6.1.9 G; and10

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7. (1F)

   when it is a small AIFM carrying on excluded custody activities.10

8. (2)

   [deleted]2

   2

10In applying the custody rules to a small AIFM's excluded custody activities, any reference to a firm carrying on the regulated activities of safeguarding and administering investments, safeguarding and administering assets (without arranging) or arranging safeguarding and administration of assets includes those excluded custody activities that would, but for the exclusion in article 72AA of the RAO, amount to whichever of those regulated activities is referred to.

1. (1)

   Firms to which the custody rules apply by virtue of CASS 6.1.1R (1B), (1D) or CASS 6.1.1R (1E) must also apply the custody rules to those custody assets which are not safe custody investments in a manner appropriate to the nature and value of those custody assets.10

2. (2)

   Firms to which the custody rules apply by virtue of CASS 6.1.1R (1C) must also apply the custody rules:10

   1. (a)

      to those custody assets which are not AIF custodial assets but are safe custody investments; and

   2. (b)

      in a manner appropriate to the nature and value of those custody assets, to those custody assets which are neither AIF custodial assets nor safe custody investments.

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]

1. (1)

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

   [Note: recital 27 to MiFID]

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2. (2)

   4Excepted from (1) is a transfer of the full ownership of a safe custody asset:

   1. (a)

      belonging to a retail client;

   2. (b)

      whose purpose is to secure or otherwise cover that client's present or future, actual, contingent or prospective obligations under a contract for differences or6 a rolling spot forex contract that is a future, and in either case where that contract is6 entered into with a firm acting as market maker; and

   3. (c)

      which is made to that firm or to any other person arranging on its behalf.

1. (1)

   4Subject to (2), where a firm makes arrangements for the purpose of securing or otherwise covering present or future, actual, contingent or prospective obligations of a retail client those arrangements must not provide for the taking of a transfer of full ownership of any of that client's safe custody assets.

2. (2)

   The application of (1) is confined to the taking of a transfer of full ownership:

   1. (a)

      whose purpose is to secure or otherwise cover that retail client's obligations under a contract for differences or6a rolling spot forex contract that is a future, and in either case where that contract is6 entered into with a firm acting as market maker; and

   2. (b)

      which is made to that firm or to any other person arranging on its behalf.

1. (1)

   9A firm must ensure that any arrangement relating to the transfer of full ownership of a client's safe custody asset to the firm for the purposes set out in CASS 6.1.6R (1) and CASS 6.1.6AR (1) is the subject of a written agreement made on a durable medium between the firm and the client.

2. (2)

   Regardless of the form of the agreement in (1) (which may have additional commercial purposes), it must cover the client's agreement to:

   1. (a)

      the terms for the arrangement relating to the transfer of the client's full ownership of the safe custody asset to the firm;

   2. (b)

      any terms under which the ownership of the safe custody asset is to transfer from the firm back to the client; and

   3. (c)

      (to the extent not covered by the terms under (b)), any terms for the termination of:

      1. (i)

         the arrangement under (a); or

      2. (ii)

         the overall agreement in (1).

3. (3)

   A firm must retain a copy of the agreement under (1) from the date the agreement is entered into and until five years after the agreement is terminated.

1. (1)

   9If a client communicates to a firm that it wishes (whether pursuant to a contractual right or otherwise) to terminate an arrangement relating to the transfer of full ownership of its safe custody asset to a firm for the purposes set out in CASS 6.1.6R (1) and CASS 6.1.6AR (1) and the client's communication is not in writing, the firm must make a written record of the client's communication which also records the date the communication was received.

2. (2)

   A firm must keep a client's written communication, or a written record of the client's communication in (1), for five years, starting from the date the communication was received by the firm.

3. (3)
   1. (a)

      If a firm agrees to the termination of an arrangement relating to the transfer of full ownership of a client's safe custody asset to the firm, it must notify the client of its agreement in writing. The notification must state when the termination is to take effect and whether or not the client's safe custody asset will be held under the custody rules by the firm thereafter.

   2. (b)

      If a firm does not agree to terminate an arrangement relating to the transfer of full ownership of a client's safe custody asset to the firm, it must notify the client of its disagreement in writing.

4. (4)

   A firm must keep a written record of any notification it makes to a client under (3) for a period of five years, starting from the date the notification was made.

9If an arrangement relating to the transfer of full ownership of safe custody assets to a firm for the purposes set out in CASS 6.1.6R (1) and CASS 6.1.6AR (1) is terminated, then the exemption at CASS 6.1.6R (1) no longer applies.

9In respect of a firm's business falling under CASS 6.1.1R (1B), the custody rules do not apply to the firm when it is safeguarding and administering investments 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.

1. (1)

   Subject to (2) and CASS 6.1.12B R and with the written agreement of the relevant client, a9 firm need not treat this chapter as applying in respect of a delivery versus payment transaction through a commercial settlement system if:9

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   1. (a)

      in respect of a client's purchase, the firm intends for the asset in question to be due to the client within one business day following the client's fulfilment of its payment obligation to the firm;9 or

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   2. (b)

      in respect of a client's sale, the firm intends for the asset in question to be due to the firm within one business day following the firm's fulfilment of its payment obligation to the client.9

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2. (2)

   If the payment or delivery by the firm to the client has not occurred by the close of business on the third business day following the date on which a firm makes use of the exemption under (1), the firm must stop using that exemption for the transaction.9

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3. (3)

   If the period referred to in CASS 6.1.12R (2) has expired before such a delivery versus payment transaction through a commercial settlement system has settled, a firm may, until settlement and provided that doing so is consistent with the firm's permissions and it complies with (4), segregate the firm's own money as client money (in accordance with the client money rules) of an amount equivalent to the value at which that safe custody asset is reasonably expected to settle instead of holding the client's safe custody assets (in accordance with the custody rules).9

4. (4)

   Where a firm intends to segregate money as client money instead of the client's safe custody asset under (3) it must, before doing so, ensure that this would result in money being held for the relevant client in respect of the shortfall under 9CASS 7.12.2 R9 (statutory trust).9

5. (5)

   Where a firm segregates an amount of client money instead of the client's safe custody assets under (3) it must also:

   1. (a)

      ensure the money is segregated under 9CASS 7.139 (Segregation of client money) and recorded as being held for the relevant client(s) under 9CASS 7.15 (Records, accounts and reconciliations);

   2. (b)

      keep a record of the actions the firm has taken under this rule which includes a description of the safe custody asset in question, identifies the relevant affected client, and specifies the amount of money that the firm has appropriated as client money to cover the value of the safe custody asset; and

   3. (c)

      update the record made under (5)(b) when the transaction in question has settled and the firm has re-appropriated the money.9

9A firm cannot, in respect of a particular delivery versus payment transaction, make use of the exemption under CASS 6.1.12 R in either or both of the following circumstances:

1. (1)

   it is not a direct member or participant of the relevant commercial settlement system, nor is it sponsored by such a member or participant, in accordance with the terms and conditions of that commercial settlement system;

2. (2)

   the transaction in question is being settled by another person on behalf of the firm through an account held at the relevant commercial settlement system by that other person.

1. (1)

   9If a firm makes use of the exemption under CASS 6.1.12 R, it must obtain the client's written agreement to the firm's use of this exemption.

2. (2)

   In respect of each client, the written agreement in (1) must be retained during the time that the firm makes use, or intends to make use, of the exemption under CASS 6.1.12 R in respect of that client's safe custody assets.

2The exemptions in CASS 6.1.16B R to CASS 6.1.16D G do not apply to a MiFID investment firm which holds financial instruments belonging to a client in the course of MiFID business.

2The custody rules do not apply to a personal investment firm when it temporarily holds a designated investment, other than in bearer form, belonging to a client, if the firm:

1. (1)

   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. (2)

   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. (3)

   makes a record, which must then be retained for a period of 5 years after the record is made, of all the designated investments handled in accordance with (1) and (2) together with the details of the clients concerned and of any action the firm has taken.

2The specialist regime in CASS 6.1.16F R to CASS 6.1.16I G does not apply to a MiFID investment firm which holds financial instruments belonging to a client in the course of MiFID business.

2When a firm arranges safeguarding and administration of assets, it must ensure that proper records of the arrangements9 are made and retained for a period of 5 years after they are made.