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CASS 7.1 Application and Purpose

Application

CASS 7.1.1 R

1This chapter (the client money rules) applies to 2 :

  1. (1)

    a MiFID investment firm:2

    1. (a)

      that holds client money; or2

    2. (b)

      that opts to comply with this chapter in accordance with CASS 7.1.3 R (1) (Opt-in to the MiFID client money rules); and2

  2. (2)

    a third country investment firm that opts to comply with this chapter in accordance with CASS 7.1.3 R (2) (Opt-in to the MiFID client money rules); 2

unless otherwise specified in this section.

CASS 7.1.2 G

CASS 7.2 (Definition of client money) sets out the circumstances in which money is considered client money for the purposes of this chapter.

Opt-in to the MiFID client money rules

CASS 7.1.3 R
  1. (1)

    A firm that receives or holds money in respect of which this chapter applies and money in respect of which the non-directive client money chapter or the insurance client money chapter applies, may elect to comply with the provisions of this chapter in respect of all such money and if it does so, this chapter applies as if all such money were money 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 receives or holds money from, for or on behalf of a client in the course of, or in connection with, its equivalent business of a third country investment firm may elect to comply with the provisions of this chapter in respect of the money it holds to which the non-directive client money chapter or the insurance client money chapter applies. If it does so, this chapter applies as if all such money were money that the firm receives and holds in the course of, or in connection with, MiFID business. 2

  3. (2)

    A firm must make and retain a written record of any 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.

CASS 7.1.4 G

The opt-in to the client money rules in2this chapter 2does not apply in respect of money that a firm holds outside of the scope of the non-directive client money chapter or the insurance client money chapter, such as money falling within the scope of the opt-out for 2non-IMD designated investment business2 (see CASS 4.1.11 R).

  1. (2)

    relevant cash deposit ISA wrapper;

CASS 7.1.5 G

If a firm has opted to comply with this chapter, the non-directive client money chapter or the insurance client money chapter will have no application to the activities to which the election applies.

CASS 7.1.6 G

A firm (other than a third country investment firm)2 that is only subject to the non-directive client money chapter or the insurance client money chapter may not opt to comply with this chapter.

CASS 7.1.7 G

If a firm that has agreed with an insurance undertaking under the client money rules in the insurance client money chapter to treat the undertaking's money as client money, opts in to this chapter in accordance with this section, the insurance undertaking's interest under the trust (or in Scotland agency) will be subordinated to the interests of the firm's other clients.

CASS 7.1.7A G

2The information requirements concerning the safeguarding of client money (see COBS 6.1.7 R) apply to a firm that has elected to comply with this chapter with respect of all client money to which the election applies.

Credit institutions

CASS 7.1.8 R

The client money rules do not apply to a BCD credit institution in relation to deposits within the meaning of the BCD held by that institution.

[Note: article 13(8) of MiFID and article 18(1) of the MiFID implementing Directive]

CASS 7.1.9 G

If a credit institution that holds money as a deposit with itself is subject to the requirement to disclose information before providing services, it should, in compliance with that obligation, notify the client that:

  1. (1)

    money held for that client in an account with the credit institution will be held by the firm as banker and not as trustee (or in Scotland as agent); and

  2. (2)

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

CASS 7.1.10 G

Pursuant to Principle 10 (Clients' assets), a credit institution that holds money as a deposit with itself should be able to account to all of its clients for amounts held on their behalf at all times. A bank account opened with the firm that is in the name of the client would generally be sufficient. When money from clients deposited with the firm is held in a pooled account, this account should be clearly identified as an account for clients. The firm should also be able to demonstrate that an amount owed to a specific client that is held within the pool can be reconciled with a record showing that individual's client balance and is, therefore, identifiable at any time. Similarly, where that money is reflected only in a firm's bank account with other banks (nostro accounts), the firm should be able to reconcile amounts owed to that client within a reasonable period of time.

  1. (1)

    it should be able to account to all of its clients sums held for them at all times; and

  2. (2)

    that money should, pursuant to Principle 10, be allocated to the relevant client promptly. This should be done no later than ten business days after the firm has received the money.

CASS 7.1.11 G

A credit institution is reminded that the exemption for deposits is not an absolute exemption from the client money rules.

Affiliated companies

CASS 7.1.12 G

A firm that holds money on behalf of, or receives money from, an affiliated company in respect of MiFID business must treat the affiliated company as any other client of the firm for the purposes of this chapter.

CASS 7.1.13 G

A firm that holds client money on behalf of, or receives money from, an affiliated company in respect of its non-MiFID business and opts under CASS 7.1.3 R (1) to comply with this chapter in with respect of that non-MiFID business, should refer to the non-directive client money chapter (see CASS 4.1.18 R (Affiliated companies)) to determine whether that money falls within the scope of the non-directive client money chapter and therefore within the scope of the opt-in.

Coins

CASS 7.1.14 R

The client money rules do not apply with respect to coins held on behalf of a client if the firm and the client have agreed that the money (or money of that type) is to be held by the firm for the intrinsic value of the metal which constitutes the coin.

Solicitors

CASS 7.1.15 R
  1. (1)

    An authorised professional firm regulated by the Law Society (of England and Wales), the Law Society of Scotland or the Law Society of Northern Ireland must comply with the MiFID client money (minimum implementing) rules and alsowiththe following rules of its designated professional body and, if it does so, it will be deemed to comply with the client money rules in this chapter.

  2. (2)

    The relevant rules are:

    1. (a)

      if the firm is regulated by the Law Society (of England and Wales):

      1. (i)

        the Solicitors' Accounts Rules 1998; or

      2. (ii)

        where applicable, the Solicitors Overseas Practice Rules 1990;

    2. (b)

      if the firm is regulated by the Law Society of Scotland, the Solicitors' (Scotland) Accounts, Accounts Certificate, Professional Practice and Guarantee Fund Rules 2001; and

    3. (c)

      if the firm is regulated by the Law Society of Northern Ireland, the Solicitors' Accounts Regulations 1998.

General purpose

CASS 7.1.16 G
  1. (1)

    Principle 10 (Clients' assets) requires a firm to arrange adequate protection for clients' assets when the firm is responsible for them. An essential part of that protection is the proper accounting and treatment of client money. The client money rules provide requirements for firms that receive or hold client money, in whatever form.

  2. (2)

    The client money rules also, implement the provisions of MiFID which regulate the obligations of a firm when it holds client money.

CASS 7.2 Definition of client money

CASS 7.2.1 R

For the purposes of this chapter and the MiFID custody chapter, client money means any money that a firm receives from or holds for, or on behalf of, a client in the course of, or in connection with, its MiFID business unless otherwise specified in this section.

Business in the name of the firm

CASS 7.2.2 R

Money is not client money where the firm carries on business in its own name 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]

Title transfer collateral arrangements

CASS 7.2.3 R

Where a client transfers full ownership of money to a firm for the purpose of securing or otherwise covering present or future, actual or contingent or prospective obligations, such money should no longer be regarded as client money.

[Note: recital 27 to MiFID]

CASS 7.2.4 G

A title transfer financial collateral arrangement under the Financial Collateral Directive is an example of a type of transfer of money to cover obligations where that money will not be regarded as client money.

CASS 7.2.5 G

Where a firm has received full title or full ownership to money under a collateral arrangement, the fact that it has also takena security interest overits obligation to repay that money to the client would not result in the money being client money. This can be compared to a situation in which a firm takes a charge or other security interest over money held in a client bank account, where that money would still be client money as there would be no absolute transfer of title to the firm. However, if that security interest includes a "right to use arrangement", under which the client agrees to transfer all of its rights to money in that account to the firm upon the exercise of the right to use, the money may cease to be client money, but only once the right to use is exercised and the money is transferred out of the accountto the firm.

CASS 7.2.6 G

Firms are reminded of the client's best interest rule, which requires a firm to act honestly, fairly and professionally in accordance with the best interests of its clients when structuring its business particularly in respect of the effect of that structure on firms' obligations under the client money rules.

CASS 7.2.7 G

Pursuant to the client's best interests rule, a firm should ensure that where a retail client transfers full ownership of money to a firm:

  1. (1)

    the client is notified that full ownership of the money has been transferred to the firm and, as such, the client no longer has a proprietary claim over this money and the firm can deal with it on its own right;

  2. (2)

    the transfer is for the purposes of securing or covering the client's obligations;

  3. (3)

    an equivalent transfer is made back to the client if the provision of collateral by the client is no longer necessary; and

  4. (4)

    there is a reasonable link between the timing and the amount of the collateral transfer and the obligation that the client owes, or is likely to owe, to the firm.

Money in connection with a "delivery versus payment" transaction

CASS 7.2.8 R

Money need not be treated as client money in respect of a delivery versus payment transaction through a commercial settlement system if it is intended that either:

  1. (1)

    in respect of a client's purchase, money from a client will be due to the firm within one business day upon the fulfilment of a delivery obligation; or

  2. (2)

    in respect of a client's sale, money is due to the client within one business day following the client's fulfilment of a delivery 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 investments by the client.

Money due and payable to the firm

CASS 7.2.9 R
  1. (1)

    Money is not client money when it becomes properly due and payable to the firm for its own account.

  2. (2)

    For these purposes, if a firm makes a payment to, or on the instructions of, a client, from an account other than a client bank account, until that payment has cleared, no equivalent sum from a client bank account for reimbursement will become due and payable to the firm.

CASS 7.2.10 G

Money held as client money becomes due and payable to the firm or for the firm's own account, for example, because the firm acted as principal in the contract or the firm, acting as agent, has itself paid for securities in advance of receiving the purchase money from its client. The circumstances in which it is due and payable will depend on the contractual arrangement between the firm and the client.

CASS 7.2.11 G

When a client's obligation or liability, that is secured by that client's asset, crystallises, and the firm realises the asset in accordance with an agreement entered into between the client and the firm, the part of the proceeds of the asset to cover such liability that is due and payable to the firm is not client money. However, any proceeds of sale in excess of the amount owed by the client to the firm should be paid over to the client immediately or be held in accordance with the client money rules.

Commission rebate

CASS 7.2.12 G

When a firm has entered into an arrangement under which commission is rebated to a client, those rebates need not be treated as client money until they become due and payable to the client in accordance with the terms of the contractual arrangements between the parties.

CASS 7.2.13 G

When commission rebate becomes due and payable to the client, the firm should:

  1. (1)

    treat it as client money; 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);

unless the firm and the client have entered into an arrangement under which the client has agreed to transfer full ownership of this money to the firm as collateral against payment of future professional fees (see CASS 7.2.3 R (Title transfer collateral arrangements)).

Interest

CASS 7.2.14 R

Unless a firm notifies a retail client in writing whether or not interest is to be paid on client money and, if so, on what terms and at what frequency, it must pay that client all interest earned on that client money. Any interest due to a client will be client money.

Discharge of fiduciary duty

CASS 7.2.15 R

Money ceases to be client money if it is paid:

  1. (1)

    to the client, or a duly authorised representative of the client; or

  2. (2)

    to a third party on the instruction of the client, unless it is transferred to a third party in the course of effecting a transaction, in accordance with CASS 7.5.2 R (Transfer of client money to a third party); or

  3. (3)

    into a bank account of the client (not being an account which is also in the name of the firm); or

  4. (4)

    to the firm itself, when it is due and payable to the firm (see CASS 7.2.9 R (Money due and payable to the firm)); or

  5. (5)

    to the firm itself, when it is an excess in the client bank account (see CASS 7.6.13 R (2) (Reconciliation discrepancies)).

CASS 7.2.16 G

When a firm wishes to transfer client money balances to a third party in the course of transferring its business to another firm, it should do so in a way which it discharges its fiduciary duty to the client under this section.

CASS 7.2.17 R

When a firm draws a cheque or other payable order to discharge its fiduciary duty to the client, it must continue to treat the sum concerned as client money until the cheque or order is presented and paid by the bank.

Allocated but unclaimed client money

CASS 7.2.18 G

The purpose ofthe rule on allocated but unclaimed client money is to allow a firm, in the normal course of its business, to cease to treat as client money any balances,allocated to an individual client, when those balances remain unclaimed.

CASS 7.2.19 R

A firm may cease to treat as client money any unclaimed client money balance if it can demonstrate that it has taken reasonable steps to trace the client concerned and to return the balance.

CASS 7.2.20 E
  1. (1)

    Taking reasonable steps should include:

    1. (a)

      entering into a written agreement, in which the client consents to the firm releasing, after the period of time specified in (b), any client money balances, for or on behalf of that client, from client bank accounts;

    2. (b)

      determining that there has been no movement on the client's balance for a period of at least six years (notwithstanding any payments or receipts of charges, interest or similar items);

    3. (c)

      writing to the client at the last known address informing the client of the firm's intention of no longer treating that balance as client money, giving the client 28 days to make a claim;

    4. (d)

      making and retaining records of all balances released from client bank accounts; and

    5. (e)

      undertaking to make good any valid claim against any released balances.

  2. (2)

    Compliance with (1) may be relied on as tending to establish compliance with CASS 7.2.19 R.

  3. (3)

    Contravention of (1) may be relied on as tending to establish contravention of CASS 7.2.19 R.

CASS 7.2.21 G

When a firm gives an undertaking to make good any valid claim against released balances, it should make arrangements authorised by the firm's relevant controllers that are legally enforceable by any person with a valid claim to such money.

CASS 7.3 Organisational requirements: client money

Requirement to protect client money

CASS 7.3.1 R

A firm must, when holding client money, make adequate arrangements to safeguard the client's rights and prevent the use of client money for its own account.

[Note: article 13(8) of MiFID]

Requirement to have adequate organisational arrangements

CASS 7.3.2 R

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

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

CASS 7.4 Segregation of client money

Depositing client money

CASS 7.4.1 R

A firm, on receiving any client money, must promptly place this money into one or more accounts opened with any of the following:

  1. (1)

    a central bank;

  2. (2)

    a BCD credit institution;

  3. (3)

    a bank authorised in a third country;

  4. (4)

    a qualifying money market fund.

[Note: article 18(1) of the MiFID implementing Directive]

CASS 7.4.2 G

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.

Qualifying money market funds

CASS 7.4.3 G

Where a firm deposits client money with a qualifying money market fund, the units in that fund should be held in accordance with the MiFID custody chapter.

[Note: recital 23 to the MiFID implementing Directive]

CASS 7.4.4 G

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.

CASS 7.4.5 R

A firm must give a client the right to oppose the placement of his money in a qualifying money market fund.

[Note: article 18(3) of the MiFID implementing Directive]

CASS 7.4.6 G

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, 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.

A firm's selection of a credit institution, bank or money market fund

CASS 7.4.7 R

A firm that does not deposit client money with a central bank must exercise all due skill, care and diligence in the selection, appointment and periodic review of the credit institution, bank or qualifying money market fund where the money is deposited and the arrangements for the holding of this money.

[Note: article 18(3) of the MiFID implementing Directive]

CASS 7.4.8 R

When a firm makes the selection, appointment and conducts the periodic review of a credit institution, a bank or a qualifying money market fund, it must take into account:

  1. (1)

    the expertise and market reputation of the third party; and

  2. (2)

    any legal requirements or market practices related to the holding of client money that could adversely affect clients' rights.

[Note: article 18(3) of the MiFID implementing Directive]

CASS 7.4.9 G

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.

CASS 7.4.10 R

A firm must make a record of the grounds upon which it satisfies itself as to the appropriateness of its selection of a credit institution, a bank or a qualifying money market fund. 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 client money.

Client bank accounts

CASS 7.4.11 R

A firm must take the necessary steps to ensure that client money deposited, in accordance with CASS 7.4.1 R, in a central bank, a credit institution, a bank authorised in a third country or a qualifying money market fund is held in an account or accounts identified separately from any accounts used to hold money belonging to the firm.

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

CASS 7.4.12 G

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 7.9.3 G).

CASS 7.4.13 G

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.

Payment of client money into a client bank account

CASS 7.4.14 G

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

  1. (1)

    the 'normal approach'; or

  2. (2)

    the 'alternative approach'.

CASS 7.4.15 R

A firm that does not adopt the normal approach 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 operate another approach effectively.

CASS 7.4.16 G

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.

CASS 7.4.17 G

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).

The alternative approach to client money segregation

CASS 7.4.18 G

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), SYSC 4.1.1 R and SYSC 6.1.1 R, 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).

CASS 7.4.19 G

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).

CASS 7.4.20 G

Pursuant to the MiFID 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.

CASS 7.4.21 R

If it is prudent to do so to ensure that client money is protected, a firm may pay into a client bank accountmoney of its own, and that money will then become client money for the purposes of this chapter.

Automated transfers

CASS 7.4.22 G

Pursuant to the MiFID 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.

Mixed remittance

CASS 7.4.23 G

Pursuant to the MiFID 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.

Appointed representatives, tied agents, field representatives and other agents1

CASS 7.4.24 G
  1. (1)

    Pursuant to the MiFID 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,1field representatives or other agents is:

    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).

CASS 7.4.25 G

The firm should ensure that its appointed representatives, tied agents, field representatives or other agents keep1client 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.

CASS 7.4.26 G

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

Client entitlements

CASS 7.4.27 G

Pursuant to the MiFID 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.

CASS 7.4.28 G

Pursuant to the MiFID 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.

Money due to a client from a firm

CASS 7.4.29 G

Pursuant to the MiFID 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.

Segregation in different currency

CASS 7.4.30 R

A firm may segregate client money in a different currency from that of receipt. If it does so, the firm must ensure that the amount held is adjusted each day to an amount at least equal to the original currency amount (or the currency in which the firm has its liability to its clients, if different), translated at the previous day's closing spot exchange rate.

CASS 7.4.31 G

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.

Commodity Futures Trading Commission Part 30 exemption order

CASS 7.4.32 G

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. The application forms and associated information can be found on the FSA website in the "Forms" section.

CASS 7.4.33 G

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. The MiFID client money chapter does not have the option of allowing the firm or the client to choose whether money belonging to the client is subject to the client money rules.

CASS 7.4.34 R

1A firm must not reduce the amount of, or cancel a letter of credit issued under, an LME bond arrangement where this will cause the firm to be in breach of its Part 30 exemption order.

CASS 7.4.35 R

1A firm must notify the FSA immediately it arranges the issue of an individual letter of credit under an LME bond arrangement.

CASS 7.5 Transfer of client money to a third party

CASS 7.5.1 G

This section sets out the requirements a firm must comply with when it transfers client money to another person without discharging its fiduciary duty owed to that client. Such circumstances arise when, for example, a firm passes client money to a clearing house in the form of margin for the firm's obligations to the clearing house that are referable to transactions undertaken by the firm for the relevant clients. They may also arise when a firm passes client money to an intermediate broker for contingent liability investments in the form of initial or variation margin on behalf of a client. In these circumstances, the firm remains responsible for that client's equity balance held at the intermediate broker until the contract is terminated and all of that client's positions at that broker closed. If a firm wishes to discharge itself from its fiduciary duty, it should do so in accordance with the rule regarding the discharge of a firm's fiduciary duty to the client (CASS 7.2.15 R).

CASS 7.5.2 R

A firm may allow another person, such as an exchange, a clearing house or an intermediate broker, to hold or control client money, but only if:

  1. (1)

    the firm transfers the client money:

    1. (a)

      for the purpose of a transaction for a client through or with that person; or

    2. (b)

      to meet a client's obligation to provide collateral for a transaction (for example, an initial margin requirement for a contingent liability investment); and

  2. (2)

    in the case of a retail client, that client has been notified that the client money may be transferred to the other person.

CASS 7.5.3 G

A firm should not hold excess client money in its client transaction accounts with intermediate brokers, settlement agents and OTC counterparties; it should be held in a client bank account.

CASS 7.6 Records, accounts and reconciliations

Records and accounts

CASS 7.6.1 R

A firm must keep such records and accounts as are necessary to enable it, at any time and without delay, to distinguish client money held for one client from client money held for any other client, and from its own money.

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

CASS 7.6.2 R

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

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

Client entitlements

CASS 7.6.3 G

Pursuant to CASS 7.6.2 R, SYSC 4.1.1 R and SYSC 6.1.1 R, a firm should take reasonable steps to ensure that is notified promptly of any receipt of client money in the form of a client entitlement.

Record keeping

CASS 7.6.4 R

A firm must ensure that records made under CASS 7.6.1 R and CASS 7.6.2 R are retained for a period of five years after they were made.

CASS 7.6.5 G

A firm should ensure that it makes proper records, sufficient to show and explain the firm's transactions and commitments in respect of its client money.

Internal reconciliations of client money balances

CASS 7.6.6 G
  1. (1)

    SYSC 4.1.1 R requires firms to have robust governance arrangements, such as internal control mechanisms, including sound administrative and accounting procedures and effective control and safeguard arrangements for information processing systems. In addition, SYSC 6.1.1 R requires firms to establish, implement and maintain adequate policies and procedures sufficient to ensure the firm's compliance with its obligations under the regulatory system. Carrying out internal reconciliations 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 should be one of the steps a firm takes to satisfy its obligations under CASS 7.6.2 R, SYSC 4.1.1 R and SYSC 6.1.1 R.

  2. (2)

    A firm should perform such internal reconciliations:

    1. (a)

      as often as is necessary; and

    2. (b)

      as soon as reasonably practicable after the date to which the reconciliation relates;

    to ensure the accuracy of the firm's records and accounts.

  3. (3)

    The standard method of internal client money reconciliation sets out a method of reconciliation of client money balances that the FSA believes should be one of the steps that a firm takes when carrying out internal reconciliations of client money.

Records

CASS 7.6.7 R
  1. (1)

    A firm must make records, sufficient to show and explain the method of internal reconciliation of client money balances under CASS 7.6.2 R used, and if different from the standard method of internal client money reconciliation, to show and explain that:

    1. (a)

      the method of internal reconciliation of client money balances used affords an equivalent degree of protection to the firm'sclients to that afforded by the standard method of internal client money reconciliation; and

    2. (b)

      in the event of a primary pooling event or a secondary pooling event, the method used is adequate to enable the firm to comply with the client money (MiFID business) distribution rules.

  2. (2)

    A firm must make these records on the date it starts using a method of internal reconciliation of client money balances and must keep it made for a period of five years after ceasing to use it.

CASS 7.6.8 R

A firm that does not use the standard method of internal client money reconciliation 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 another method effectively.

Reconciliations with external records

CASS 7.6.9 R

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

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

Frequency of external reconciliations

CASS 7.6.10 G
  1. (1)

    A firm should perform the required reconciliation of client money balances with external records:

    1. (a)

      as regularly as is necessary; and

    2. (b)

      as soon as reasonably practicable after the date to which the reconciliation relates;

    to ensure the accuracy of its internal accounts and records against those of third parties by whom client money is held.

  2. (2)

    In determining whether the frequency is adequate, the firm should consider the risks which the business is exposed, such as the nature, volume and complexity of the business, and where and with whom the client money is held.

Method of external reconciliations

CASS 7.6.11 G

A method of reconciliation of client money balances with external records that the FSA believes is adequate is when a firm compares:

  1. (1)

    the balance on each client bank account as recorded by the firm with the balance on that account as set out on the statement or other form of confirmation issued by the bank with which those accounts are held; and

  2. (2)

    the balance, currency by currency, on each client transaction account as recorded by the firm, with the balance on that account as set out in the statement or other form of confirmation issued by the person with whom the account is held;

and identifies any discrepancies between them.

CASS 7.6.12 R

Any approved collateral held in accordance with the client money rules must be included within this reconciliation.

Reconciliation discrepancies

CASS 7.6.13 R

When any discrepancy arises as a result of a firm's internal reconciliations, the firm must identify the reason for the discrepancy and ensure that:

  1. (1)

    any shortfall is paid into a client bank account by the close of business on the day that the reconciliation is performed; or

  2. (2)

    any excess is withdrawn within the same time period (but see CASS 7.4.20 G and CASS 7.4.21 R).

CASS 7.6.14 R

When any discrepancy arises as a result of the reconciliation between a firm's internal records and those of third parties that hold client money, the firm must identify the reason for the discrepancy and correct it as soon as possible, unless the discrepancy arises solely as a result of timing differences between the accounting systems of the party providing the statement or confirmation and that of the firm.

CASS 7.6.15 R

While a firm is unable to resolve a difference arising from a reconciliation between a firm's internal records and those of third parties that hold client money, and one record or a set of records examined by the firm during its reconciliation indicates that there is a need to have a greater amount of client money or approved collateral than is in fact the case, the firm must assume, until the matter is finally resolved, that the record or set of records is accurate and pay its own money into a relevant account.

Notification requirements

CASS 7.6.16 R

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 7.6.1 R, CASS 7.6.2 R or CASS 7.6.9 R;

  2. (2)

    if having carried out a reconciliation it has not complied with, or is unable, in any material respect, to comply with CASS 7.6.13 R to CASS 7.6.15 R.

Audit of compliance with the MiFID client money rules

CASS 7.6.17 G

Firms are reminded that the auditor of the firm has to confirm in the report submitted to the FSA under SUP 3.10 (Duties of auditors: notification and report on client assets) that the firm has maintained systems adequate to enable it to comply with the client money rules.

CASS 7.6.18 G

Firms that do not adopt the normal approach are reminded that the firm's auditor must confirm to the FSA in writing that the firm has in place systems and controls which are adequate to enable it to operate the alternative approach effectively (see CASS 7.4.15 R).

CASS 7.6.19 G

Firms that do not use the standard method of internal client money reconciliation are reminded that the firm's auditor must confirm to the FSA in writing that the firm has in place systems and controls which are adequate to enable it to use another method effectively (see CASS 7.6.8 R).

CASS 7.7 Statutory trust

CASS 7.7.1 G

Section 139(1) of the Act (Miscellaneous ancillary matters) provides that rules may make provision which result in client money being held by a firm on trust (England and Wales and Northern Ireland) or as agent (Scotland only). This section creates a fiduciary relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership of the client. In the event of failure of the firm, costs relating to the distribution of client money may have to be borne by the trust.

Requirement

CASS 7.7.2 R

A firm receives and holds client money as trustee (or in Scotland as agent) on the following terms:

  1. (1)

    for the purposes of and on the terms of the client money rules and the client money (MiFID business) distribution rules;

  2. (2)

    subject to (3), for the clients (other than clients which are insurance undertakings when acting as such with respect of client money received in the course of insurance mediation activity and that was opted in to this chapter) for whom that money is held, according to their respective interests in it;

  3. (3)

    after all valid claims in (2) have been met, for clients which are insurance undertakings with respect of client money received in the course of insurance mediation activity according to their respective interests in it;

  4. (4)

    on failure of the firm, for the payment of the costs properly attributable to the distribution of the client money in accordance with (2); and

  5. (5)

    after all valid claims and costs under (2) to (4) have been met, for the firm itself.

CASS 7.8 Notification and acknowledgement of trust

Banks

CASS 7.8.1 R
  1. (1)

    When a firm opens a client bank account, the firm must give or have given written notice to the bank requesting the bank to acknowledge to it in writing that:

    1. (a)

      all money standing to the credit of the account is held by the firm as trustee (or if relevant, as agent) and that the bank is not entitled to combine the account with any other account or to exercise any right of set-off or counterclaim against money in that account in respect of any sum owed to it on any other account of the firm; and

    2. (b)

      the title of the account sufficiently distinguishes that account from any account containing money that belongs to the firm, and is in the form requested by the firm.

  2. (2)

    In the case of a client bank account in the United Kingdom, if the bank does not provide the required acknowledgement within 20 business days after the firm dispatched the notice, the firm must withdraw all money standing to the credit of the account and deposit it in a client bank account with another bank as soon as possible.

Exchange, clearing house, intermediatebroker or OTC counterparty

CASS 7.8.2 R
  1. (1)

    A firm which undertakes any contingent liability investment for clients through an exchange, clearing house, intermediate broker or OTC counterparty must, before the client transaction account is opened with the exchange, clearing house, intermediate broker or OTC counterparty:

    1. (a)

      notify the person with whom the account is to be opened that the firm is under an obligation to keep client money separate from the firm's own money, placing client money in a client bank account;

    2. (b)

      instruct the person with whom the account is to be opened that any money paid to it in respect of that transaction is to be credited to the firm'sclient transaction account; and

    3. (c)

      require the person with whom the account is to be opened to acknowledge in writing that the firm'sclient transaction account is not to be combined with any other account, nor is any right of set-off to be exercised by that person against money credited to the client transaction account in respect of any sum owed to that person on any other account.

  2. (2)

    If the intermediate broker or OTC counterparty does not provide the required acknowledgement within 20 business days of the dispatch of the notice and instruction, the firm must cease using the client transaction account with that broker or counterparty and arrange as soon as possible for the transfer or liquidation of any open positions and the repayment of any money.

CASS 7.9 Client money distribution

Application

CASS 7.9.1 R

This section (the client money (MiFID business) distribution rules) applies to a firm that holds client money which is subject to the client money rules when a primary pooling event or a secondary pooling event occurs.

Purpose

CASS 7.9.2 G

The client money (MiFID business) distribution rules seek to facilitate the timely return of client money to a client in the event of the failure of a firm or third party at which the firm holds client money.

Failure of the authorised firm: primary pooling event

CASS 7.9.3 G

A firm can hold client money in either a general client bank account, a designated client bank account or a designated client fund account. A firm holds all client money in general client bank accounts for its clients as part of a common pool of money so those particular clients do not have a claim against a specific sum in a specific account; they only have a claim to the client money in general. A firm holds client money in designated client bank accounts or designated client fund accounts for those clients that requested their client money be part of a specific pool of money, so those particular clients do have a claim against a specific sum in a specific account; they do not have a claim to the client money in general unless a primary pooling event occurs. A primary pooling event triggers a notional pooling of all the client money, in every type of client money account, and the obligation to distribute it. If the firm becomes insolvent, and there is (for whatever reason) a shortfall in money held for a client compared with that client's entitlements, the available funds will be distributed in accordance with the client money (MiFID business) distribution rules.

CASS 7.9.4 R

A primary pooling event occurs:

  1. (1)

    on the failure of the firm;

  2. (2)

    on the vesting of assets in a trustee in accordance with an 'assets requirement' imposed under section 48(1)(b) of the Act;

  3. (3)

    on the coming into force of a requirement for all client money held by the firm; or

  4. (4)

    when the firm notifies, or is in breach of its duty to notify, the FSA, in accordance with CASS 7.6.16 R (Notification requirements), that it is unable correctly to identify and allocate in its records all valid claims arising as a result of a secondary pooling event.

CASS 7.9.5 R

CASS 7.9.4 R (4) does not apply so long as:

  1. (1)

    the firm is taking steps, in consultation with the FSA, to establish those records; and

  2. (2)

    there are reasonable grounds to conclude that the records will be capable of rectification within a reasonable period.

Pooling and distribution

CASS 7.9.6 R

If a primary pooling event occurs:

  1. (1)

    client money held in each client money account of the firm is treated as pooled; and

  2. (2)

    the firm must distribute that client money in accordance with CASS 7.7.2 R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7.9.7 R.

CASS 7.9.7 R
  1. (1)

    When, in respect of a client, there is a positive individual client balance and a negative client equity balance, the credit must be offset against the debit reducing the individual client balance for that client.

  2. (2)

    When, in respect of a client, there is a negative individual client balance and a positive client equity balance, the credit must be offset against the debit reducing client equity balance for that client.

CASS 7.9.8 G

A client's main claim is for the return of client money held in a client bank account. A client may be able to claim for any shortfall against money held in a firm's own account. For that claim, the client will be an unsecured creditor of the firm.

Client money received after the failure of the firm

CASS 7.9.9 R

Client money received by the firm after a primary pooling event must not be pooled with client money held in any client money account operated by the firm at the time of the primary pooling event. It must be placed in a client bank account that has been opened after that event and must be handled in accordance with the client money rules, and returned to the relevant client without delay, except to the extent that:

  1. (1)

    it is client money relating to a transaction that has not settled at the time of the primary pooling event; or

  2. (2)

    it is client money relating to a client, for whom the client money entitlement, calculated in accordance with CASS 7.9.7 R, shows that money is due from the client to the firm at the time of the primary pooling event.

CASS 7.9.10 G

Client money received after the primary pooling event relating to an unsettled transaction should be used to settle that transaction. Examples of such transactions include:

  1. (1)

    an equity transaction with a trade date before the date of the primary pooling event and a settlement date after the date of the primary pooling event; or

  2. (2)

    a contingent liability investment that is 'open' at the time of the primary pooling event and is due to settle after the primary pooling event.

CASS 7.9.11 R

If a firm receives a mixed remittance after a primary pooling event, it must:

  1. (1)

    pay the full sum into the separate client bank account opened in accordance with CASS 7.9.9 R; and

  2. (2)

    pay the money that is not client money out of that client bank account into a firm's own bank account within one business day of the day on which the firm would normally expect the remittance to be cleared.

CASS 7.9.12 G

Whenever possible the firm should seek to split a mixed remittance before the relevant accounts are credited.

Failure of a bank, intermediate broker, settlement agent or OTC counterparty: secondary pooling events

CASS 7.9.13 R

If both a primary pooling event and a secondary pooling event occur, the provisions of this section relating to a primary pooling event apply.

CASS 7.9.14 R

A secondary pooling event occurs on the failure of a third party to which client money held by the firm has been transferred under CASS 7.4.1 R (1) to CASS 7.4.1 R (3) (Depositing client money) or CASS 7.5.2 R (Transfer of client money to a third party).

CASS 7.9.15 R

CASS 7.9.19 R to CASS 7.9.31 R do not apply if, on the failure of the third party, the firm repays to its clients or pays into a client bank account, at an unaffected bank, an amount equal to the amount of client money which would have been held if a shortfall had not occurred at that third party.

CASS 7.9.16 G

When client money is transferred to a third party, a firm continues to owe fiduciary duties to the client. Whether a firm is liable for a shortfall in client money caused by a third party failure will depend on whether it has complied with its duty of care as agent or trustee.

Failure of a bank

CASS 7.9.17 G

When a bank fails and the firm decides not to make good the shortfall in the amount of client money held at that bank, a secondary pooling event will occur in accordance with CASS 7.9.19 R. The firm would be expected to reflect the shortfall that arises at the failed bank in its records of the entitlement of clients and of money held with third parties.

CASS 7.9.18 G

The client money (MiFID business) distribution rules seek to ensure that clients who have previously specified that they are not willing to accept the risk of the bank that has failed, and who therefore requested that their client money be placed in a designated client bank account at a different bank, should not suffer the loss of the bank that has failed.

Failure of a bank: pooling

CASS 7.9.19 R

If a secondary pooling event occurs as a result of the failure of a bank where one or more general client bank accounts are held, then:

  1. (1)

    in relation to every general client bank account of the firm, the provisions of CASS 7.9.21 R, CASS 7.9.26 R and CASS 7.9.27 R will apply;

  2. (2)

    in relation to every designated client bank account held by the firm with the failed bank, the provisions of CASS 7.9.23 R, CASS 7.9.26 R and CASS 7.9.27 R will apply;

  3. (3)

    in relation to each designated client fund account held by the firm with the failed bank, the provisions of CASS 7.9.24 R, CASS 7.9.26 R and CASS 7.9.27 R will apply;

  4. (4)

    any money held at a bank, other than the bank that has failed, in designated client bank accounts, is not pooled with any other client money; and

  5. (5)

    any money held in a designated client fund account, no part of which is held by the bank that has failed, is not pooled with any other client money.

CASS 7.9.20 R

If a secondary pooling event occurs as a result of the failure of a bank where one or more designated client bank accounts or designated client fund accounts are held, then:

  1. (1)

    in relation to every designated client bank account held by the firm with the failed bank, the provisions of CASS 7.9.23 R, CASS 7.9.26 R and CASS 7.9.27 R will apply; and

  2. (2)

    in relation to each designated client fund account held by the firm with the failed bank, the provisions of CASS 7.9.24 R, CASS 7.9.26 R and CASS 7.9.27 R will apply.

CASS 7.9.21 R

Money held in each general client bank account and client transaction account of the firm must be treated as pooled and:

  1. (1)

    any shortfall in client money held, or which should have been held, in general client bank accounts and client transaction accounts, that has arisen as a result of the failure of the bank, must be borne by all the clients whose client money is held in either a general client bank account or client transaction account of the firm, rateably in accordance with their entitlements;

  2. (2)

    a new client money entitlement must be calculated for each client by the firm, to reflect the requirements in (1), and the firm's records must be amended to reflect the reduced client money entitlement;

  3. (3)

    the firm must make and retain a record of each client's share of the client moneyshortfall at the failed bank until the client is repaid; and

  4. (4)

    the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance) (as described in CASS 7.6.6 G).

CASS 7.9.22 G

The term 'which should have been held' is a reference to the failed bank's failure to hold the client money at the time of the pooling event.

CASS 7.9.23 R

For each client with a designated client bank account held at the failed bank:

  1. (1)

    any shortfall in client money held, or which should have been held, in designated client bank accounts that has arisen as a result of the failure, must be borne by all the clients whose client money is held in a designated client bank account of the firm at the failed bank, rateably in accordance with their entitlements;

  2. (2)

    a new client money entitlement must be calculated for each of the relevant clients by the firm, and the firm's records must be amended to reflect the reduced client money entitlement;

  3. (3)

    the firm must make and retain a record of each client's share of the client moneyshortfall at the failed bank until the client is repaid; and

  4. (4)

    the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance) (as described in CASS 7.6.6 G).

CASS 7.9.24 R

Money held in each designated client fund account with the failedbank must be treated as pooled with any other designated client fund accounts of the firm which contain part of the same designated fund and:

  1. (1)

    any shortfall in client money held, or which should have been held, in designated client fund accounts that has arisen as a result of the failure, must be borne by each of the clients whose client money is held in that designated fund, rateably in accordance with their entitlements;

  2. (2)

    a new client money entitlement must be calculated for each client by the firm, in accordance with (1), and the firm's records must be amended to reflect the reduced client money entitlement;

  3. (3)

    the firm must make and retain a record of each client's share of the client moneyshortfall at the failed bank until the client is repaid; and

  4. (4)

    the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance) (as described in CASS 7.6.6 G).

CASS 7.9.25 R

A client whose money was held, or which should have been held, in a designated client bank account with a bank that has failed is not entitled to claim in respect of that money against any other client bank account or client transaction account of the firm.

Client money received after the failure of a bank

CASS 7.9.26 R

Client money received by the firm after the failure of a bank, that would otherwise have been paid into a client bank account at that bank:

  1. (1)

    must not be transferred to the failed bank unless specifically instructed by the client in order to settle an obligation of that client to the failed bank; and

  2. (2)

    must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:

    1. (a)

      on the written instruction of the client, transferred to a bank other than the one that has failed; or

    2. (b)

      returned to the client as soon as possible.

CASS 7.9.27 R

If a firm receives a mixed remittance after the secondary pooling event which consists of client money that would have been paid into a general client bank account, a designated client bank account or a designated client fund account maintained at the bank that has failed, it must:

  1. (1)

    pay the full sum into a client bank account other than one operated at the bank that has failed; and

  2. (2)

    pay the money that is not client money out of that client bank account within one business day of the day on which the firm would normally expect the remittance to be cleared.

CASS 7.9.28 G

Whenever possible the firm should seek to split a mixed remittance before the relevant accounts are credited.

Failure of an intermediate broker, settlement agent or OTC counterparty: Pooling

CASS 7.9.29 R

If a secondary pooling event occurs as a result of the failure of an intermediate broker, settlement agent or OTC counterparty, then in relation to every general client bank account and client transaction account of the firm, the provisions of CASS 7.9.30 R and CASS 7.9.31 R will apply.

CASS 7.9.30 R

Money held in each general client bank account and client transaction account of the firm must be treated as pooled and:

  1. (1)

    any shortfall in client money held, or which should have been held, in general client bank accounts and client transaction account, that has arisen as a result of the failure, must be borne by all the clients whose client money is held in either a general client bank account or a client transaction accounts of the firm, rateably in accordance with their entitlements;

  2. (2)

    a new client money entitlement must be calculated for each client by the firm, to reflect the requirements of (1), and the firm's records must be amended to reflect the reduced client money entitlement;

  3. (3)

    the firm must make and retain a record of each client's share of the client moneyshortfall at the failedintermediate broker, settlement agent or OTC counterparty until the client is repaid; and

  4. (4)

    the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance) (as described in CASS 7.6.6 G).

Client money received after the failure of an intermediate broker, settlement agent or OTC counterparty

CASS 7.9.31 R

Client money received by the firm after the failure of an intermediate broker, settlement agent or OTC counterparty, that would otherwise have been paid into a client transaction account at that intermediate broker, settlement agent or OTC counterparty:

  1. (1)

    must not be transferred to the failed third party unless specifically instructed by the client in order to settle an obligation of that client to the failedintermediate broker, settlement agent or OTC counterparty; and

  2. (2)

    must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:

    1. (a)

      on the written instruction of the client, transferred to a third party other than the one that has failed; or

    2. (b)

      returned to the client as soon as possible.

Notification to the FSA: failure of a bank, intermediate broker, settlement agent or OTC counterparty

CASS 7.9.32 R

On the failure of a third party with which money is held, a firm must notify the FSA:

  1. (1)

    as soon as it becomes aware of the failure of any bank, intermediate broker, settlement agent, OTC counterparty or other entity with which it has placed, or to which it has passed, client money; and

  2. (2)

    as soon as reasonably practical, whether it intends to make good any shortfall that has arisen or may arise and of the amounts involved.

CASS 7 Annex 1 Annex 1

G

As explained in CASS 7.6.6 G, in complying with its obligations under CASS 7.6.2 R (Records and accounts), SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance), a firm should carry out internal reconciliations of records and accounts of client money the firm holds in client bank accounts and client transaction accounts. This Annex sets out a method of reconciliation that the FSA believes is appropriate for these purposes (the standard method of internal client money reconciliation).

  1. 1. Each business day, a firm that adopts the normal approach (see CASS 7.4.17 G) should check whether its client money resource, being the aggregate balance on the firm'sclient bank accounts, as at the close of business on the previous business day, was at least equal to the client money requirement, as defined in paragraph 6 below, as at the close of business on that day.

  2. 2. Each business day, a firm that adopts the alternative approach (see CASS 7.4.18 G) should ensure that its client money resource, being the aggregate balance on the firm'sclient bank accounts, as at the close of business on that business day is at least equal to the client money requirement, as defined in paragraph 6 below, as at the close of business on the previous business day.

  3. 3. No excess or shortfall should arise when adopting the alternative approach.

  4. 4. If a firm is operating the alternative approach and draws a cheque on its own bank account, it will be expected to account for those cheques that have not yet cleared when performing its reconciliations of records and accounts under paragraph 2. An historic average estimate of uncleared cheques may be used to satisfy this obligation (see CASS 7.4.19 G (3)).

  5. 5. For the purposes of performing its reconciliations of records and accounts under paragraphs 1 or 2, a firm should use the values contained in its accounting records, for example its cash book, rather than values contained in statements received from its banks and other third parties.

Client money requirement

  1. 6. The client money requirement is either:

    1. (1) (subject to paragraph 18) the sum of, for all clients:

      1. (a) the individual client balances calculated in accordance with paragraph 7, excluding:

        1. (i) individual client balances which are negative (that is, debtors); and

        2. (ii) clients' equity balances; and

      2. (b) the total margined transaction requirement calculated in accordance with paragraph 14; or

    2. (2) the sum of:

      1. (a) for each client bank account:

        1. (i) the amount which the firm's records show as held on that account; and

        2. (ii) an amount that offsets each negative net amount which the firm's records show attributed to that account for an individual client; and

    3. (b) the total margined transaction requirement calculated in accordance with paragraph 14.

General transactions

7. The individual client balance for each client should be calculated in accordance with this table:

    Individual client balance calculation

    Free money (no trades) and

    A

    sale proceeds due to the client:

    (a)

    in respect of principal deals when the client has delivered the designated investments; and

    B

    (b)

    in respect of agency deals, when either:

    (i)

    the sale proceeds have been received by the firm and the client has delivered the designated investments; or

    C1

    (ii)

    the firm holds the designated investments for the client; and

    C2

    the cost of purchases:

    (c)

    in respect of principal deals, paid for by the client but the firm has not delivered the designated investments to the client; and

    D

    (d)

    in respect of agency deals, paid for by the client when either:

    (i)

    the firm has not remitted the money to, or to the order of, the counterparty; or

    E1

    (ii)

    the designated investments have been received by the firm but have not been delivered to the client;

    E2

    Less

    money owed by the client in respect of unpaid purchases by or for the client if delivery of those designated investments has been made to the client; and

    F

    Proceeds remitted to the client in respect of sales transactions by or for the client if the client has not delivered the designated investments.

    G

    Individual Client Balance 'X' = (A+B+C1+C2+D+E1+E2)-F-G

    X

  1. 8. A firm should calculate the individual client balance using the contract value of any client purchases or sales.

  2. 9. A firm may choose to segregate designated investments instead of the value identified in paragraph 7 (except E1) if it ensures that the designated investments are held in such a manner that the firm cannot use them for its own purposes.

  3. 10. Segregation in the context of paragraph 9 can take many forms, including the holding of a safe custody investment in a nominee name and the safekeeping of certificates evidencing title in a fire resistant safe. It is not the intention that all the custody rules in the MiFID custody chapter should be applied to designated investments held in the course of settlement.

  4. 11. In determining the client money requirement under paragraph 6, a firm need not include money held in accordance with CASS 7.2.8 R (Delivery versus payment transaction).

  5. 12. In determining the client money requirement under paragraph 6, a firm:

    1. (1) should include dividends received and interest earned and allocated;

    2. (2) may deduct outstanding fees, calls, rights and interest charges and other amounts owed by the client which are due and payable to the firm (see CASS 7.2.9 R);

    3. (3) need not include client money in the form of client entitlements which are not required to be segregated (see CASS 7.4.27 G) nor include client money forwarded to the firm by its appointed representatives, tied agents, 1field representatives and other agents, but not received (see CASS 7.4.24 G);

    4. (4) should take into account any client money arising from CASS 7.6.13 R (Reconciliation discrepancies); and

    5. (5) should include any unallocated client money.

Equity balance

  1. 13. A firm's equity balance, whether with an exchange, intermediate broker or OTC counterparty, is the amount which the firm would be liable to pay to the exchange, intermediate broker or OTC counterparty (or vice-versa) in respect of the firm'smargined transactions if each of the open positions of the firm'sclients was liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and the firm's account with the exchange, intermediate broker or OTC counterparty is closed.

Margined transaction requirement

  1. 14. The total margined transaction requirement is:

    1. (1) the sum of each of the client's equity balances which are positive;

    Less

    1. (2) the proportion of any individual negative client equity balance which is secured by approved collateral; and

    2. (3) the net aggregate of the firm's equity balance (negative balances being deducted from positive balances) on transaction accounts for customers with exchanges, clearing houses, intermediate brokers and OTC counterparties.

  2. 15. To meet a shortfall that has arisen in respect of the requirement in paragraph 6(1)(b) or 6(2)(b), a firm may utilise its own approved collateral provided it is held on terms specifying when it is to be realised for the benefit of clients, it is clearly identifiable from the firm's own property and the relevant terms are evidenced in writing by the firm. In addition, the proceeds of the sale of that collateral should be paid into a client bank account.

  3. 16. If a firm's total margined transaction requirement is negative, the firm should treat it as zero for the purposes of calculating its client money requirement.

  4. 17. The terms 'client equity balance' and 'firm's equity balance' in paragraph 13 refer to cash values and do not include non-cash collateral or other designated investments held in respect of a margined transaction.

  5. 17A. A firm with a Part 30 exemption order which also operates an LME bond arrangement for the benefit of US-resident investors, should exclude the client equity balances for transactions undertaken on the London Metal Exchange on behalf of those US-resident investors from the calculation of the margined transaction requirement.1

Reduced client money requirement option

  1. 18.

    1. (1) When, in respect of a client, there is a positive individual client balance and a negative client equity balance, a firm may offset the credit against the debit and hence have a reduced individual client balance in paragraph 7 for that client.

    2. (2) When, in respect of a client, there is a negative individual client balance and a positive client equity balance, a firm may offset the credit against the debit and hence have a reduced client equity balance in paragraph 14 for that client.

  2. 19. The effect of paragraph 18 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 paragraphs 7 and 14, and, by so doing, reduce the amount the firm is required to segregate.