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; 7

   9
5. (1D)

   when it is acting as trustee or depositary of a UCITS; and97

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'sdesignated 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

      9
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'sexcluded 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]

   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)

   9A firm must ensure that any arrangement relating to the transfer of full ownership of a client'ssafe 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.

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, a9firm need not treat this chapter as applying in respect of a delivery versus payment transaction through a commercial settlement system if:9

   929
   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

      9
   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

      9
   9
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

   9
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'spermissions 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'ssafe 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'ssafe 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 CASS 7.7.2 R (statutory trust).9

5. (5)

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

   1. (a)

      ensure the money is segregated under CASS 7.499 (Segregation of client money) and recorded as being held for the relevant client(s) under CASS 7.69 (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'ssafe 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 firmarranges 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.

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

      5
   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.

6A firm may either (i) liquidate an unclaimed safe custody asset it holds for a client, at market value, and pay away the proceeds or (ii) pay away an unclaimed safe custody asset it holds for a client, in either case, to a registered charity of its choice provided:

1. (1)

   this is permitted by law and consistent with the arrangements under which that safe custody asset is held;

2. (2)

   it has held that safe custody asset for at least 12 years;

3. (3)

   in the 12 years preceding the divestment of that safe custody asset, it has not received instructions relating to any safe custody assets from or on behalf of the client concerned;

4. (4)

   it can demonstrate that it has taken reasonable steps to trace the client concerned and return that safe custody asset; and

5. (5)

   the firm complies with CASS 6.2.14 R: the undertaking requirement.

6Where a firm liquidates a safe custody asset under CASS 6.2.10 R, it must pay away the proceeds to charity as soon as practicable.

6Where a firm divests itself of a client'ssafe custody asset under CASS 6.2.10 R, it must comply with either (1)(a) or (1)(b) and, in either case, (2).

1. (1)
   1. (a)

      The firm must unconditionally undertake to pay to the client concerned a sum equal to the value of the safe custody asset at the time it was liquidated or paid away in the event of the client seeking to claim the safe custody asset in future.

   2. (b)

      The firm must ensure that an unconditional undertaking in the terms set out in (1)(a)7 is made by a member of its group and there is suitable information available for relevant clients to identify the member of the group granting the undertaking.

2. (2)

   Any undertaking under this rule must be:

   1. (a)

      authorised by the firm'sgoverning body where (1)(a)7 applies or the governing body of the group member where (1)(b)7 applies;

   2. (b)

      legally enforceable by any person that had a legally enforceable claim to the unclaimed safe custody asset in question at the time it was divested by the firm, or by an assign or successor in title to such claim; and

   3. (c)

      retained by the firm, and, where (1)(b)7 applies, by the group member, indefinitely.

1. (1)

   6If a firm pays away a client's unclaimed safe custody assets to charity or liquidates a client's unclaimed safe custody assets and pays the proceeds to charity under CASS 6.2.10 R it must make and retain, or where the firm already has such records, retain:

   1. (a)

      records of all safe custody assets divested under CASS 6.2.10 R (including details of the value of each asset at that time and the identity of the client to whom the asset was allocated);

   2. (b)

      all relevant documentation (including charity receipts); and

   3. (c)

      details of the communications the firm had or attempted to make with the client concerned pursuant to CASS 6.2.10R (4).

2. (2)

   Records in (1) must be retained indefinitely.

3. (3)

   If a member of the firm'sgroup has provided an undertaking under CASS 6.2.14R (1)(b) then the records in (1) must be readily accessible to that group member.

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]

6A firm must have entered into a written agreement with any person with whom it deposits clients'safe custody assets under CASS 6.3.1 R, or with whom it arranges safeguarding and administration of assets which are clients'safe custody assets. This agreement must, at minimum:

1. (1)

   set out the binding terms of the arrangement between the firm and the third party;

2. (2)

   be in force for the duration of that arrangement; and

3. (3)

   clearly set out the custody service(s) that the third party is contracted to provide.

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.

Unless otherwise stated, a firm must ensure that any record made under the custody rules is retained for a period of five years starting from the later of:6

1. (1)

   the date it was created; and6

2. (2)

   (if it has been modified since the date it was created), the date it was most recently modified.6

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.