This chapter (the custody rules) applies to a firm:21

1. (1)

   [deleted]2

   2
   1. (a)

      [deleted]2

      2
   2. (b)

      [deleted]2

      2
2. (1A)

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

   7
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; and/or 7

5. (1D)

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

6. (2)

   [deleted]2

   2

2 Firms to which the custody rules apply by virtue of CASS 6.1.1R (1B), (1C) or (1D)7 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.

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]

   4
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 personarranging 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'ssafe 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)

   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 safe custody asset2 is either to be:

   2
   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 safe custody asset2 by the client.

   2
2. (2)

   Until such a delivery versus payment transaction through a commercial settlement system settles, a firm may segregate money (in accordance with the client money chapter ) instead of the client'ssafe custody assets.2

   22

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 firm when it acts as the operator of a regulated collective investment scheme, in relation to activities carried on for the purpose of, or in connection with, the operation of the scheme.

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 trustee firm or depositary within CASS 6.1.16F R arranges for, or delegates the provision of safe custody services by or to another person, the trustee firm or depositary must also comply with CASS 6.3.1 R (Depositing assets and arranging for assets to be deposited with third parties) in addition to the custody rules listed in the table in CASS 6.1.16F R.

2When a firmarranges safeguarding and administration of assets, it must ensure that proper records of the custody assets which it arranges for another to hold or receive, on behalf of the client, are made and retained for a period of 5 years after they are made.

1A firm must, when holding safe custody assets2 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 safe custody assets2 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' safe custody assets,2 or the rights in connection with those safe custody assets,2 as a result of the misuse of the safe custody assets,2 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 safe custody asset2 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 (Depositing assets and arranging for assets to be deposited with third parties);3

3. (3)

   any other third party if:

   1. (a)

      the safe custody asset2 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
   2. (b)

      the firm has notified the client in writing;

4. (4)

   the firmif:

   1. (a)

      the safe custody asset2 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
   2. (b)

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

4If:

1. (1)

   the safe custody asset is an emission auction product that is a financial instrument; and

2. (2)

   it is not practicable or possible for a firm to effect registration or recording of legal title in this asset in the manner set out in CASS 6.2.3 R,

the firm must register or record legal title in its name provided it has notified the client in writing.

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 applicable assets2 in the same name as that in which legal title to a safe custody asset2 is registered or recorded, but only if:

1. (1)

   the firm'sapplicable assets2 are separately identified in the firm's records from the safe custody assets;2 or

   22
2. (2)

   the firm registers or records a safe custody asset2 in accordance with CASS 6.2.3R (4).

   2

A firm must ensure that any documents of title to applicable assets2 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's safe custody assets2 in bearer form.

1. (1)

   1A firm may deposit safe custody assets2 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 safe custody assets.2

   22
2. (1A)

   A firm which arranges the registration of a safe custody investment through a third party must exercise all due skill, care and diligence in the selection and appointment of the third party.2

3. (2)

   A firm must take the necessary steps to ensure that any client'ssafe custody assets2 deposited with a third party, in accordance with this rule are identifiable separately from the applicable assets2 belonging to the firm and from the applicable assets2 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.

   222
4. (3)

   When a firm makes the selection, appointment and conducts the periodic review referred to 2under 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 safe custody assets2 that could adversely affect clients' rights.

      2
5. (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 safe custody assets2 belonging to clients.

   2

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

1. (1)

   A firm must only deposit safe custody assets2 with a third party in a jurisdiction which specifically regulates and supervises the safekeeping of safe custody assets2 for the account of another person with a third party who is subject to such regulation.

   22
2. (2)

   A firm must not deposit safe custody assets2 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 safe custody assets2 for the account of another person unless:

   22
   1. (a)

      the nature of the safe custody assets2 or of the investment services connected with those safe custody assets2 requires them to be deposited with a third party in that third country; or

      22
   2. (b)

      the safe custody assets2 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.

      2
3. (3)

   [deleted]2

   2
   1. (a)

      [deleted]2

      2
   2. (b)

      [deleted]2

      2
      1. (i)

         [deleted]2

         2
      2. (ii)

         [deleted]2

         2
      3. (iii)

         [deleted]2

         2

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

Subject to CASS 6.3.6 R, in relation to a third party with which a firm deposits safe custody assets belonging to a client, a firm must ensure that any5 agreement with that third party relating to the custody of those assets does not include the grant to that party, or to any other person, of a lien or a right of retention or sale over the safe custody assets, or a right of set-off over any client money derived from those safe custody assets.3

A firm may conclude an agreement with a third party relating to the custody of safe custody assets which confers on that5 party, or on another person instructed by that party to provide custody services for those assets,5 a lien, right of retention or sale, or right of set-off in favour of that party or that other person only if that lien or right:

1. (1)

   is confined to those safe custody assets held in an account with that third party or that other person and extends only to5 properly incurred charges and liabilities arising from the provision of custody services in respect of safe custody assets held in that account; or5

   55
2. (2)

   arises under the operating terms of a securities depository, securities settlement system or central counterparty in whose account safe custody assets5 are recorded or held, and provided that it does so for the purpose only of facilitating the settlement of trades involving the assets held in that account; or5

   55
3. (3)

   arises in relation to those safe custody assets5 held in a jurisdiction outside the United Kingdom,5 provided that:

   5
   1. (a)

      it does so as a result of local applicable law in that jurisdiction or is necessary for that firm to gain access to the local market in that jurisdiction;5 and

      5
   2. (b)

      in respect of each client to which those assets belong, either:5

      1. (i)

         the firm has taken reasonable steps to determine that holding those assets subject to that lien or right is in the best interests of that client; or5

      2. (ii)

         where a client is a professional client, the firm is instructed by that client to hold those assets in that jurisdiction notwithstanding the existence of that lien or right.5

5For the purpose of CASS 6.3.6 R, references to a safe custody asset include any client money derived from that safe custody asset. Client money derived from a safe custody asset may be regarded as held in the same account as that safe custody asset even though that money and those assets may be recorded separately.

5 CASS 6.3.6 R does not permit a firm to agree to a right of set-off of the kind prohibited by either CASS 7.8.1 R or CASS 7.8.2 R in relation to client money.

1. (1)

   1A firm must not enter into arrangements for securities financing transactions in respect of safe custody assets2 held by it on behalf of a client or otherwise use such safe custody assets2 for its own account or the account of another client of the firm, unless:

   22
   1. (a)

      the client has given express prior consent to the use of the safe custody assets2 on specified terms; and

      2
   2. (b)

      the use of that client'ssafe custody assets2 is restricted to the specified terms to which the client consents.

      2
2. (2)

   A firm must not enter into arrangements for securities financing transactions in respect of safe custody assets2 held by it on behalf of a client in an omnibus account held by a third party, or otherwise use safe custody assets2 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):

   22
   1. (a)

      each client whose safe custody assets2 are held together in an omnibus account has given express prior consent in accordance with (1)(a); or

      2
   2. (b)

      the firm has in place systems and controls which ensure that only safe custody assets2 belonging to clients who have given express prior consent in accordance with the requirements of (1)(a) are used.

      2
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.

4. (4)

   [deleted]4

   4

[Note: article 19 of the MiFID implementing Directive]

Where a firm uses safe custody assets2 as permitted in this section, the records of the firm must include details of the client on whose instructions the use of the safe custody assets2 has been effected, as well as the number of safe custody assets2 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 safe custody assets2 held for one client from safe custody assets2 held for any other client, and from the firm's own applicable assets.2

[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 safe custody assets2 held for clients.

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

3A firm must keep a copy of every executed client agreement that includes that firm's right to use safe custody assets for its own account, including in the case of a prime brokerage agreement the disclosure annex referred to in CASS 9.3.1 R.

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 FCA 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 safe custody assets2 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 FCA 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. (1A)

   if it is a firmacting as trustee or depositary of an AIF and has not complied with, or is materially unable to comply with, the requirements in CASS 6.5.1 R and/or articles 89(1)(b) or 89(1)(c) (Safekeeping duties with regard to assets held in custody) of the AIFMD level 2 regulation; or 5

3. (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.