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

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]

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]

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'sfinancial instruments.

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.

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.

1A firm must, when holding financial instruments belonging to clients, make adequate arrangements so as to safeguard clients' ownership rights, especially in the event of the firm's insolvency, and to prevent the use of financial instruments belonging to a client on the firm's own account except with the client's express consent.

[Note: article 13(7) of MiFID]

A firm must introduce adequate organisational arrangements to minimise the risk of the loss or diminution of clients'financial instruments, or the rights in connection with thosefinancial instruments, as a result of the misuse of the financial instruments, fraud, poor administration, inadequate record-keeping or negligence.

[Note: article 16(1)(f) of the MiFID implementing Directive]

To the extent practicable, a firm must effect appropriate registration or recording of legal title to a financial instrument in the name of:

1. (1)

   the client (or, where appropriate, the trustee firm), unless the client is an authorised person acting on behalf of its client, in which case it may be registered in the name of the client of that authorised person;

2. (2)

   a nominee company which is controlled by:

   1. (a)

      the firm;

   2. (b)

      an affiliated company;

   3. (c)

      a recognised investment exchange or a designated investment exchange; or

   4. (d)

      a third party with whom financial instruments are deposited under CASS 6.3;

3. (3)

   any other third party if:

   1. (a)

      the financial instrument is subject to the law or market practice of a jurisdiction outside the United Kingdom and the firm has taken reasonable steps to determine that it is in the client's best interests to register or record it in that way, or that it is not feasible to do otherwise, because of the nature of the applicable law or market practice; and

   2. (b)

      the firm has notified the client in writing;

4. (4)

   the firmif:

   1. (a)

      the financial instrument is subject to the law or market practice of a jurisdiction outside the United Kingdom and the firm has taken reasonable steps to determine that it is in the client's best interests to register or record it in that way, or that it is not feasible to do otherwise, because of the nature of the applicable law or market practice; and

   2. (b)

      the firm has notified the client if a professional client, or obtained prior written consent if a retail client.

A firm must accept the same level of responsibility to its client for any nominee company controlled by the firm with respect of any requirements of the custody rules.

A firm may register or record legal title to its own financial instrument in the same name as that in which legal title to a financial instrument is registered or recorded, but only if:

1. (1)

   the firm'sfinancial instruments are separately identified in the firm's records from the financial instruments; or

2. (2)

   the firm registers or records a financial instrument in accordance with CASS 6.2.3R (4).

A firm must ensure that any documents of title to financial instruments in bearer form, belonging to the firm and which it holds in its physical possession, are kept separately from any document of title to a client'sfinancial instrument in bearer form.

1. (1)

   1A firm may deposit financial instruments held by it on behalf of its clients into an account or accounts opened with a third party, but only if it exercises all due skill, care and diligence in the selection, appointment and periodic review of the third party and of the arrangements for the holding and safekeeping of those financial instruments.

2. (2)

   A firm must take the necessary steps to ensure that any client'sfinancial instruments deposited with a third party, in accordance with this rule are identifiable separately from the financial instruments belonging to the firm and from the financial instruments belonging to that third party, by means of differently titled accounts on the books of the third party or other equivalent measures that achieve the same level of protection.

3. (3)

   When a firm makes the selection, appointment and conducts the periodic review referred under this rule, it must take into account:

   1. (a)

      the expertise and market reputation of the third party; and

   2. (b)

      any legal requirements or market practices related to the holding of those financial instruments that could adversely affect clients' rights.

4. (4)

   A firm must make a record of the grounds upon which it satisfies itself as to the appropriateness of its selection of a third party as required in this rule. The firm must make the record on the date it makes the selection and must keep it from the date of such selection until five years after the firm ceases to use the third party to hold financial instruments belonging to clients.

[Note: articles 16(1)(d) and 17(1) of the MiFID implementing Directive]

1. (1)

   A firm must only deposit financial instruments with a third party in a jurisdiction which specifically regulates and supervises the safekeeping of financial instruments for the account of another person with a third party who is subject to such regulation.

2. (2)

   A firm must not deposit financial instruments held on behalf of a client with a third party in a country that is not an EEA State (third country) and which does not regulate the holding and safekeeping of financial instruments for the account of another person unless:

   1. (a)

      the nature of the financial instruments or of the investment services connected with those financial instruments requires them to be deposited with a third party in that third country; or

   2. (b)

      the financial instruments are held on behalf of a professional client and the client requests the firm in writing to deposit them with a third party in that third country.

3. (3)

   In the case of activities a firm has opted into this chapter under CASS 6.1.17R (1) and (2) do not apply. However, the firm must deposit financial instruments belonging to clients pursuant to such activities with a custodian and must hold any document of title to a financial instrument either in the physical possession of the firm or:

   1. (a)

      for a retail client, with a custodian;

   2. (b)

      for a professional client, with one or more of the following:

      1. (i)

         a custodian;

      2. (ii)

         any person whom the firm has taken reasonable steps to determine is a person whose business includes the provision of appropriate safe custody services; or

      3. (iii)

         in accordance with the professional client's specific written instructions.

[Note: article 17(2) and (3) of the MiFID implementing Directive]

1. (1)

   1A firm must not enter into arrangements for securities financing transactions in respect of financial instruments held by it on behalf of a client or otherwise use such financial instruments for its own account or the account of another client of the firm, unless:

   1. (a)

      the client has given express prior consent to the use of the financial instruments on specified terms; and

   2. (b)

      the use of that client'sfinancial instruments is restricted to the specified terms to which the client consents.

2. (2)

   A firm must not enter into arrangements for securities financing transactions in respect of financial instruments held by it on behalf of a client in an omnibus account held by a third party, or otherwise use financial instruments held in such an account for its own account or for the account of another client unless, in addition to the conditions set out in (1):

   1. (a)

      each client whose financial instruments are held together in an omnibus account has given express prior consent in accordance with (1)(a); or

   2. (b)

      the firm has in place systems and controls which ensure that only financial instruments belonging to clients who have given express prior consent in accordance with the requirements of (1)(a) are used.

3. (3)

   For the purposes of obtaining the express prior consent of a retail client under this rule the signature of the retail client or an equivalent alternative mechanism is required.

[Note: article 19 of the MiFID implementing Directive]

Where a firm uses financial instruments as permitted in this section, the records of the firm must include details of the client on whose instructions the use of the financial instruments has been effected, as well as the number of financial instruments used belonging to each client who has given consent, so as to enable the correct allocation of any loss.

[Note: article 19(2) of the MiFID implementing Directive]

1A firm must keep such records and accounts as necessary to enable it at any time and without delay to distinguish financial instruments held for one client from financial instruments held for any other client, and from the firm's own financial instruments.

[Note: article 16(1)(a) of the MiFID implementing Directive]

A firm must maintain its records and accounts in a way that ensures their accuracy, and in particular their correspondence to the financial instruments held for clients.

[Note: article 16(1)(b) of the MiFID implementing Directive]

A firm must ensure that the records made under this section are retained for a period of five years after they are made.

A firm that uses an alternative reconciliation method must first send 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 use the method effectively.

A firm must conduct on a regular basis, reconciliations between its internal accounts and records and those of any third parties by whom those financial instruments are held.

[Note: article 16(1)(c) of the MiFID implementing Directive]

A firm must promptly correct any discrepancies which are revealed in the reconciliations envisaged by this section, and make good, or provide the equivalent of, any unreconciled shortfall for which there are reasonable grounds for concluding that the firm is responsible.

A firm must inform the FSA in writing without delay:

1. (1)

   if it has not complied with, or is unable, in any material respect, to comply with the requirements in CASS 6.5.1 R, CASS 6.5.2 R or CASS 6.5.6 R; or

2. (2)

   if, having carried out a reconciliation, it has not complied with, or is unable, in any material respect, to comply with CASS 6.5.10 R.