CASS 7.16 The standard methods of internal client money reconciliation

1. (1)

   Firms are required to carry out an internal client money reconciliation each business day (CASS 7.15.12 R and CASS 7.15.15 R). This section sets out methods of reconciliation that are appropriate for these purposes (the standard methods of internal client money reconciliation).

2. (2)

   Where a firm establishes one or more sub-pools, the provisions of CASS 7.16 (The standard methods of internal client money reconciliation) shall be read as applying to the firm's general pool and each sub-pool individually, in line with CASS 7.19.3 R and CASS 7.19.4 R.

1. (1)

   A non-standard method of internal client money reconciliation is a method of internal client money reconciliation which does not meet the requirements of this section.

2. (2)

   Where a firm uses a non-standard method of internal client money reconciliation it is reminded that it must comply with the requirements in CASS 7.15.18 R.

Regardless of whether a firm is following one of the standard methods of internal client money reconciliation or a non-standard method of internal client money reconciliation, it is reminded that it must maintain its records so that it is able to promptly calculate the total amount of client money it should be holding for each client (see CASS 7.15.15 R (1)).

Firms are reminded that the internal client money reconciliation should achieve the purposes set out in CASS 7.15.14 G.

1. (1)

   A firm that adopts the normal approach to segregating client money (CASS 7.13.6 R) will be using the methods in this section to check whether it has correctly segregated client money in its client bank accounts.

2. (2)

   A firm that adopts the alternative approach to segregating client money (CASS 7.13.54 G) will be using the methods in this section to calculate how much money it needs to withdraw from, or place in, client bank accounts as a result of any discrepancy arising between its client money requirement and its client money resource at the close of business on the previous business day.

Unless otherwise stated, firms are reminded that they are required to receive all client money receipts directly into a client bank account (see CASS 7.13.6 R).

A firm that receives client money in the form of cash, a cheque or other payable order is reminded that it must pay that money (eg, into a client bank account) no later than on the business day after it receives the money (see CASS 7.13.32 R). Once deposited into a client bank account, that receipt of client money should form part of the firm's client money resource (see CASS 7.16.8 R). In calculating its client money requirement, a firm will need to take into account any client money received as cash, cheques or payment orders but not yet deposited into a client bank account (see CASS 7.16.25 R (3) and CASS 7.16.26 G).

1. (1)

   A firm should ensure that the amount it reflects in its internal client money reconciliation as its client money resource is equal to the aggregate balance on its client bank accounts. For example, if:

   1. (a)

      a firm holds client money received as cash, cheques or payment orders but not yet deposited in a client bank account (in accordance with CASS 7.13.32 R); and

   2. (b)

      that firm records all receipts from clients, whether or not yet deposited with a bank, in its cashbook (see CASS 7.16.26 G (1)(a));

   its client money resource should not include the cash, cheques or payment orders received but not yet deposited in a client bank account.

2. (2)

   The guidance in (1) is consistent with a firm's obligations to maintain its internal records in an accurate way, particularly their correspondence to the client money held for clients.

1. (1)

   The client money requirement should represent the total amount of client money a firm is required to have segregated in client bank accounts under the client money rules.

2. (2)

   CASS 7.16.11 R does not prevent a firm from adopting a net negative add-back method as part of a non-standard method of internal client money reconciliation.

3. (3)

   CASS 7.16.12 R does not prevent a CASS loan-based crowdfunding firm from adopting the individual client balance method as part of a non-standard method of internal client money reconciliation.

4. (4)

   If a firm uses the individual client balance method in respect of some of its business lines and the net negative add-back method in respect of others it will be conducting a non-standard method of internal client money reconciliation.

1. (1)

   The individual client balance method (CASS 7.16.16 R) may be applied by any firm except a CASS 7 loan-based crowdfunding firm. This method requires a firm to calculate the total amount of client money it should be segregating in client bank accounts by reference to how much the firm should be holding in total (ie, across all its client bank accounts and businesses) for each of its individual clients for:

   1. (a)

      non-margined transactions (CASS 7.16.16 R (1) and CASS 7.16.21 R);

   2. (b)

      margined transactions (CASS 7.16.16 R (2) and CASS 7.16.32 R); and

   3. (c)

      certain other matters (CASS 7.16.16 R (3) and CASS 7.16.25 R).

2. (2)
   1. (a)

      CASS 7.16.22 E is an evidential provision which sets out a method firms should use for calculating how much they should be holding in total for each individual client for non-margined transactions.

   2. (b)

      The calculation in CASS 7.16.22 E permits a firm to calculate either one individual client balance across all its products and business lines1 for each client or a number of individual client balances for each1 client equal to the number of products or business lines1 operated by the firm in connection with that client1 (see CASS 7.16.22 E (1)).

   3. (c)

      The calculation referred to in (2)(b) may also be applied by different types of firms and, as a result, each firm will need to apply the calculation in way which recognises the business model under which that firm operates.

The net negative add-back method (CASS 7.16.17 R) is available to CASS 7 asset management firms and CASS 7 loan-based crowdfunding firms, many of whom may operate internal ledger systems on a bank account by bank account, not client-by-client, basis. This method allows a firm to calculate the total amount of client money it is required to have segregated in client bank accounts by reference to:

1. (1)

   the balances in each client bank account (see CASS 7.16.17 R (1) and CASS 7.16.18 G (2));

2. (2)

   whether any individual client's net position in a specific client bank account is negative (see CASS 7.16.17 R (2) and CASS 7.16.18 G (2)); and

3. (3)

   certain other matters (see CASS 7.16.17 R (2) and CASS 7.16.25 R).

1. (1)

   A firm which utilises the net negative add-back method is reminded that it must do so in a way which allows it to maintain its records so that, at any time, the firm is able to promptly determine the total amount of client money it should be holding for each client (see CASS 7.15.5 R (1)).

2. (2)

   For the purposes of CASS 7.16.17 R, a firm should be able to readily use the figures previously recorded in its internal records and ledgers (for example, its cashbook or other internal accounting records) as at the close of business on the previous business day without undertaking any additional steps to determine the balances in the firm's client bank accounts.

1. (1)

   A firm which utilises the net negative add-back method may1 calculate its client money requirement and client money resource on a bank account by bank account basis;

2. (2)

   For1 the purposes of CASS 7.16.17 R, a firm should take into account any amounts that have been segregated as client money according to the firm's records under either or both CASS 7.13.50 R (prudent segregation record) and CASS 7.13.66 R (alternative approach mandatory prudent segregation record).

The sum of positive individual client balances for each client should represent the total amount of all money the firm holds, has received or is obligated to have received or be holding as client money in a client bank account for that client for non-margined transactions.

If a firm calculates each individual client balance on a product-by-product or business line-by-business line1 basis under CASS 7.16.22 E (1)(b), the result should be that the firm does not net client positions across all products and accounts.

1. (1)

   Under CASS 7.16.25 R (3), where a firm holds client money received as cash, cheques or payment orders but not yet deposited in a client bank account under CASS 7.13.32 R, it may:

   1. (a)

      include these balances when calculating its client money requirement (eg, where the firm records all receipts from clients, whether or not yet deposited with a bank, in its cashbook); or

   2. (b)

      exclude these balances when calculating its client money requirement (eg, where the firm only records client receipts to its cashbook once deposited with a bank).

2. (2)

   In line with (1)(a), the firm will need to ensure that, before finalising the calculation of its client money requirement within this section, it deducts these balances, to ensure that they do not give rise to a discrepancy between the firm's client money requirement and client money resource (see CASS 7.15.29 R).

3. (3)

   In line with (1)(b), although the balances concerned do not form part of the firm's client money requirement, the firm must continue to account for all receipts of client money as cash, cheques or payment orders but not yet deposited in a client bank account in its records and accounts (see CASS 7.13.32 R and CASS 7.15.9 R).

1. (1)

   In accordance with CASS 7.16.25 R (5), where a firm has allowed another person to hold client money in connection with a client's non-margined transaction (eg, in a client transaction account under CASS 7.14 (Client money held by a third party))1, the firm should include these balances when calculating its client money requirement.

2. (2)

   If a firm is utilising the individual client balance method (CASS 7.16.16 R) to calculate its client money requirement, CASS 7.16.21 R requires the firm to include the sums its holds for each client that are placed with another person in connection with a client's non-margined transaction when calculating a client's individual client balance (eg, see CASS 7.16.22 E and items C1 and E2).

3. (3)

   Under (1) and (2), the firm will need to ensure that, before finalising the calculation of its client money requirement within this section, it deducts positive2 balances held for clients adding back negative balances attributable to2 clients' non-margined transactions in client transaction accounts, to ensure that they do not give rise to a discrepancy between the firm's client money requirement and client money resource (see CASS 7.15.29 R).

4. (4)

   Under (1), (2) and (3), in determining the balances of client money a firm has allowed another person to hold in connection with a client's non-margined transaction or the balances held for clients' non-margined transactions in client transaction accounts, a firm should use the values contained in its internal records and ledgers (see CASS 7.15.13 R).

The margined transaction requirement should represent the total amount of client money a firm is required under the client money rules to segregate in client bank accounts for margined transactions. The calculation in CASS 7.16.33 R is designed to ensure that an amount of client money is held in client bank accounts which equals at least the difference between the equity the firm holds at exchanges, clearing houses, intermediate brokers and OTC counterparties for margined transactions for clients entitled to protection under the client money rules, and the amount due to clients under the client money rules for those same margined transactions. With this calculation, a firm's margined transaction requirement should represent, if positions were unwound, the firm's gross liabilities to clients entitled to protection under the client money rules for margined transactions.

Where CASS 7.16.33 R applies, the firm will be reducing the requirement arising from CASS 7.16.16 R (2) and, as such, simultaneously reducing its overall client money requirement (ie, the amount of money the firm is required to segregate in client bank accounts).

The effect of CASS 7.16.37 R is to allow a firm to offset, on a client-by-client basis, a negative amount with a positive amount arising out of the calculations in CASS 7.16.21 R and CASS 7.16.28 R and, therefore, reduce its overall client money requirement.