CASS 7.4 Segregation of client money

An account with a central bank, a BCD credit institution or a bank authorised in a third country in which client money is placed is a client bank account.

Where a firm deposits client money with a qualifying money market fund, the units in that fund should be held in accordance with CASS 6.2

[Note: recital 23 to the MiFID implementing Directive]

A firm that places client money in a qualifying money market fund should ensure that it has the permissions required to invest in and hold units in that fund and must comply with the rules that are relevant for those activities.

If a firm that intends to place client money in a qualifying money market fund is subject to the requirement to disclose information before providing services,4 it should, in compliance with that obligation, notify the client that:

1. (1)

   money held for that client will be held in a qualifying money market fund; and

2. (2)

   as a result, the money will not be held in accordance with the client money rules but in accordance with the custody rules.

In discharging its obligations when selecting, appointing and reviewing the appointment of a credit institution, a bank or a qualifying money market fund, a firm should also consider, together with any other relevant matters:

1. (1)

   the need for diversification of risks;

2. (2)

   the capital of the credit institution or bank;

3. (3)

   the amount of client money placed, as a proportion of the credit institution or bank's capital and deposits, and, in the case of a qualifying money market fund, compared to any limit the fund may place on the volume of redemptions in any period;

4. (4)

   the credit rating of the credit institution or bank; and

5. (5)

   to the extent that the information is available, the level of risk in the investment and loan activities undertaken by the credit institution or bank and affiliated companies.

A firm may open one or more client bank accounts in the form of a general client bank account, a designated client bank account or a designated client fund account (see CASS 7A.2.1 G (Failure of the authorised firm: primary pooling event).4

A designated client fund account may be used for a client only where that client has consented to the use of that account and all other designated client fund accounts which may be pooled with it. For example, a client who consents to the use of bank A and bank B should have his money held in a different designated client fund account at bank B from a client who has consented to the use of banks B and C.

Two approaches that a firm can adopt in discharging its obligations under the client money segregation requirements are:

1. (1)

   the 'normal approach'; or

2. (2)

   the 'alternative approach'.

The alternative approach would be appropriate for a firm that operates in a multi-product, multi-currency environment for which adopting the normal approach would be unduly burdensome and would not achieve the client protection objective. Under the alternative approach, client money is received into and paid out of a firm's own bank accounts; consequently the firm should have systems and controls that are capable of monitoring the client money flows so that the firm can comply with its obligations to perform reconciliations of records and accounts (see CASS 7.6.2 R). A firm that adopts the alternative approach will segregate client money into a client bank account on a daily basis, after having performed a reconciliation of records and accounts of the entitlement of each client for whom the firm holds client money with the records and accounts of the client money the firm holds in client bank accounts and client transaction accounts to determine what the client money requirement was at the close of the previous business day.

Under the normal approach, a firm that receives client money should either:

1. (1)

   pay it promptly, and in any event no later than the next business day after receipt, into a client bank account; or

2. (2)

   pay it out in accordance with the rule regarding the discharge of a firm's fiduciary duty to the client (see CASS 7.2.15 R).

Under the alternative approach, a firm that receives client money should:

1. (1)
   1. (a)

      pay any money to or on behalf of clients out of its own account; and

   2. (b)

      perform a reconciliation of records and accounts required under CASS 7.6.2 R (Records and accounts), and where relevant 2 SYSC 4.1.1 R (General requirements)4 and SYSC 6.1.1 R (Compliance),4 adjust the balance held in its client bank accounts and then segregate the money in the client bank account until the calculation is re-performed on the next business day; or

2. (2)

   pay it out in accordance with the rule regarding the discharge of a firm's fiduciary duty to the client (see CASS 7.2.15 R).

A firm that adopts the alternative approach may:

1. (1)

   receive all client money into its own bank account;

2. (2)

   choose to operate the alternative approach for some types of business (for example, overseas equities transactions) and operate the normal approach for other types of business (for example, contingent liability investments) if the firm can demonstrate that its systems and controls are adequate (see CASS 7.4.15 R); and

3. (3)

   use an historic average to account for uncleared cheques (see paragraph 4 of CASS 7 Annex 1 G).

Pursuant to the client money segregation requirements, a firm should ensure that any money other than client money deposited in a client bank account is promptly paid out of that account unless it is a minimum sum required to open the account, or to keep it open.

Pursuant to the client money segregation requirements, a firm operating the normal approach that receives client money in the form of an automated transfer should take reasonable steps to ensure that:

1. (1)

   the money is received directly into a client bank account; and

2. (2)

   if money is received directly into the firm's own account, the money is transferred into a client bank account promptly, and in any event, no later than the next business day after receipt.

Pursuant to the client money segregation requirements, a firm operating the normal approach that receives a mixed remittance (that is part client money and part other money) should:

1. (1)

   pay the full sum into a client bank account promptly, and in any event, no later than the next business day after receipt; and

2. (2)

   pay the money that is not client money out of the client bank account promptly, and in any event, no later than one business day of the day on which the firm would normally expect the remittance to be cleared.

1. (1)

   Pursuant to the client money segregation requirements, a firm operating the normal approach should establish and maintain procedures to ensure that client money received by its appointed representatives, tied agents,1 field representatives or other agents is:

   2
   1. (a)

      paid into a client bank account of the firm promptly, and in any event, no later than the next business day after receipt; or

   2. (b)

      forwarded to the firm, or in the case of a field representative forwarded to a specified business address of the firm, so as to ensure that the money arrives at the specified business address promptly, and in any event, no later than the close of the third business day.

2. (2)

   For the purposes of 1(b), client money received on business day one should be forwarded to the firm or specified business address of the firm promptly, and in any event, no later than the next business day after receipt (business day two) in order for it to reach that firm or specified business address by the close of the third business day. Procedures requiring the client money in the form of a cheque to be sent to the firm or the specified business address of the firm by first class post promptly, and in any event, no later than the next business day after receipt, would be in line with 1(b).

The firm should ensure that its appointed representatives, tied agents, field representatives or other agents keep1 client money separately identifiable from any other money (including that of the firm) until the client money is paid into a client bank account or sent to the firm.

A firm that operates a number of small branches, but holds or accounts for all client money centrally, may treat those small branches in the same way as appointed representatives and tied agents.1

Pursuant to the client money segregation requirements, a firm operating the normal approach that receives outside the United Kingdom a client entitlement on behalf of a client should pay any part of it which is client money:

1. (1)

   to, or in accordance with, the instructions of the client concerned; or

2. (2)

   into a client bank account promptly, and in any event, no later than five business days after the firm is notified of its receipt.

Pursuant to the client money segregation requirements, a firm operating the normal approach should allocate a client entitlement that is client money to the individual client promptly and, in any case, no later than ten business days after notification of receipt.

Pursuant to the client money segregation requirements, a firm operating the normal approach that is liable to pay money to a client should promptly, and in any event no later than one business day after the money is due and payable, pay the money:

1. (1)

   to, or to the order of, the client; or

2. (2)

   into a client bank account.

The rule on segregation of client money in a different currency (CASS 7.4.30 R) does not apply where the client has instructed the firm to convert the money into and hold it in a different currency.

1United States (US) legislation restricts the ability of non-US firms to trade on behalf of US customers on non-US futures and options exchanges. The relevant US regulator (the CFTC) operates an exemption system for firms authorised by the FSA. The FSA sponsors the application from a firm for exemption from Part 30 of the General Regulations under the US Commodity Exchange Act in line with this system.

1A firm with a Part 30 exemption order undertakes to the CFTC that it will refuse to allow any US customer to opt not to have his money treated as client money if it is held or received in respect of transactions on non-US exchanges, unless that US customer is an "eligible contract participant" as defined in section 1a(12) of the Commodity Exchange Act, 7 U.S.C. In doing so, the firm is representing that if available to it, it will not make use of the opt-out arrangements in CASS 7.1.7B R to CASS 7.1.7F R in relation to that business.2