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You are viewing the version of the document as on 2023-04-21.

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    2023-04-21

MIFIDPRU 4.8 K-CMH requirement

MIFIDPRU 4.8.1R

1The K-CMH requirement of a MIFIDPRU investment firm is equal to the sum of:

  1. (1)

    0.4% of average CMH held by the firm in segregated accounts; and

  2. (2)

    0.5% of average CMH held by the firm in non-segregated accounts.

MIFIDPRU 4.8.2G
  1. (1)

    1Generally, a MIFIDPRU investment firm should be holding client money in one or more segregated accounts. Under MIFIDPRU 4.8.9E, where a firm complies with the applicable requirements of CASS 7 in relation to an amount of client money, there is a presumption that the client money is being held in a segregated account.

  2. (2)

    As a result, the K-CMH requirement for non-segregated accounts is most likely to be relevant where:

    1. (a)

      the K-CMH requirement applies on a consolidated basis and:

      1. (i)

        the consolidated situation includes one or more entities to which CASS does not apply, such as third country entities, that receive money from customers; and

      2. (ii)

        the arrangements under which the entity in (i) holds money received from customers do not meet the conditions in MIFIDPRU 4.8.8R (as they apply on a consolidated basis under MIFIDPRU 2.5.30R); or

    2. (b)

      a MIFIDPRU investment firm has not complied with the CASS 7 requirements, in which case the firm should treat any non-compliant arrangements as non-segregated accounts for the purposes of calculating any K-CMH requirement that includes that period of non-compliance.

  3. (3)

    However, the scenario in (2)(b) does not affect any obligation that the firm has under CASS, or under any other rule, to take specified action or to notify the FCA where the firm has identified that it has breached the requirements of CASS.

MIFIDPRU 4.8.3R

1When calculating its CMH in accordance with this section, a MIFIDPRU investment firm must include any amounts that relate to MiFID business of the firm that is carried on by any tied agent acting on its behalf.

MIFIDPRU 4.8.4G

1As a result of the restrictions in SUP 12.6.5R and SUP 12.6.15R, the FCA generally expects that MIFIDPRU 4.8.3R would not be directly relevant to MIFIDPRU investment firms on an individual basis. However, where this section applies on a consolidated basis in accordance with MIFIDPRU 2.5 (Prudential consolidation), the UK parent entity must include any CMH attributable to a tied agent of a third country investment firm included within the consolidated situation.

MIFIDPRU 4.8.5G
  1. (1)

    1The definition of CMH includes only client money which is MiFID client money. Therefore, client money which is received in connection with business other than MiFID business does not need to be included within a MIFIDPRU investment firm’s calculation of CMH, except to the extent that MIFIDPRU 4.8.6R applies.

  2. (2)

    The definition of MiFID client money includes the following:

    1. (a)

      money deposited into a client bank account in accordance with CASS 7.13.3R;

    2. (b)

      money originally received in connection with MiFID business which a firm has placed in a qualifying money market fund in accordance with CASS 7.13.3R(4). This means that while the units or shares in the relevant qualifying money market fund must still be treated by the firm as client assets for the purposes of CASS and must be dealt with in accordance with CASS 7.13.26R, the value of those units or shares must be included in CMH for the purposes of MIFIDPRU;

    3. (c)

      an amount of the firm’s own money that the firm has paid into its client bank account for the purposes of CASS 7.13.65R where the firm is applying alternative approach mandatory prudent segregation; and

      1. (i)

        prudent segregation;

      2. (ii)

        alternative approach mandatory prudent segregation; or

      3. (iii)

        clearing arrangement mandatory prudent segregation; and

    4. (d)

      money received from a client in connection with MiFID business which a firm has allowed a third party (such as an exchange, a clearing house or an intermediate broker) to hold in accordance with CASS 7.14 (Client money held by a third party).

  3. (3)

    Where a firm controls money under a mandate in accordance with CASS 8, the money is not MiFID client money if it is not client money received or held by the firm. A firm is not required to include any money it controls but does not hold within its calculation of CMH.

  4. (4)

    Although money that is not MiFID client money does not contribute to the K-CMH requirement, a MIFIDPRU investment firm should still consider any potential material harms that may arise in connection with receiving money from clients as part of their ICARA process under MIFIDPRU 7. This includes any material harms that may arise in relation to amounts received that are not treated as client money, such as under a title transfer collateral arrangement.

MIFIDPRU 4.8.6R

1If a MIFIDPRU investment firm is unsure whether client money should be classified as MiFID client money, it must treat the relevant amount as MiFID client money for the purposes of this section until the firm is satisfied that the amount is not MiFID client money.

MIFIDPRU 4.8.7G

1MIFIDPRU 4.8.6R applies only for the purposes of determining how the client money concerned should be treated for the purposes of MIFIDPRU. It does not affect how the client money should be treated for the purposes of other provisions in the Handbook (such as CASS or COBS) or under any other legislation.

MIFIDPRU 4.8.8R

1An arrangement is a segregated account if it is an arrangement in respect of which a firm (“A”) ensures that all of the following conditions are met:

  1. (1)

    A keeps records and accounts enabling A, at any time and without delay, to distinguish assets held for one client from assets held for any other client and from A’s own assets;

  2. (2)

    A maintains its records and accounts in a way that ensures their accuracy, and in particular that they correspond to the assets held for clients and may be used as an audit trail;

  3. (3)

    A conducts, on a regular basis, reconciliations between A’s internal accounts and records and those of any third parties by whom those assets are held;

  4. (4)

    A takes the necessary steps to ensure that deposited client funds are held in an account or accounts identified separately from any accounts used to hold funds belonging to A;

  5. (5)

    A operates adequate organisational arrangements to minimise the risk of the loss or diminution of client assets or of rights in connection with those assets, as a result of misuse of the assets, fraud, poor administration, inadequate record-keeping or negligence; and

  6. (6)

    the applicable national law provides that, in the event of A’s insolvency or entry into resolution or administration, assuming that A has complied with (1) to (5), client funds cannot be used to satisfy claims against A, other than claims by the relevant clients.

MIFIDPRU 4.8.9E
  1. (1)

    1This rule applies for the purposes of MIFIDPRU 4.8.8R.

  2. (2)

    A MIFIDPRU investment firm which holds client money must comply with, among other requirements, the applicable requirements on:

    1. (a)

      organisational requirements in relation to client money in CASS 7.12;

    2. (b)

      segregation of client money in CASS 7.13 or client money held by a third party in CASS 7.14;

    3. (c)

      records, accounts and reconciliations in CASS 7.15; and

    4. (d)

      acknowledgement letters in CASS 7.18.

  3. (3)

    Compliance with (2) in relation to an arrangement may be relied on as tending to establish compliance with the conditions for that arrangement to be classified as a segregated account in MIFIDPRU 4.8.8R.

  4. (4)

    Contravention of (2) in relation to an arrangement may be relied on as tending to establish contravention of the conditions for that arrangement to be classified as a segregated account in MIFIDPRU 4.8.8R.

MIFIDPRU 4.8.10G

1The effect of MIFIDPRU 4.8.9E is that if a MIFIDPRU investment firm complies with the provisions of CASS specified in MIFIDPRU 4.8.9E(2) for a particular arrangement for client money, it can proceed on the basis that the client money is being held in a segregated account for the purposes of the K-CMH requirement. However, if the firm does not comply with the relevant CASS provisions in relation to a client money arrangement, this will generally be evidence that the relevant client money should be treated as being held in a non-segregated account for the purposes of calculating the K-CMH requirement.

MIFIDPRU 4.8.11G

1Where consolidation under MIFIDPRU 2.5 (Prudential consolidation) applies to an investment firm group, MIFIDPRU 2.5.30R and MIFIDPRU 2.5.31R explain how to calculate the consolidated K-CMH requirement.

MIFIDPRU 4.8.12R

1A firm must calculate its K-CMH requirement on the first business day of each month.

MIFIDPRU 4.8.13R

1A firm must calculate the amount of its average CMH by:

  1. (1)

    taking the total CMH as measured at the end of each business day during the previous 9 months;

  2. (2)

    excluding the daily values for the most recent 3 months; and

  3. (3)

    calculating the arithmetic mean of the daily values for the remaining 6 months.

MIFIDPRU 4.8.14R

1For the purpose of the calculation in MIFIDPRU 4.8.13R, a firm must measure CMH in accordance with, to the extent applicable:

  1. (1)

    any records, accounts and reconciliations that the firm maintains to comply with the requirements of CASS 7.15 (Records, accounts and reconciliations); and

  2. (2)

    any values contained in accounting records.

MIFIDPRU 4.8.15R

1Where a firm has been holding CMH for less than 9 months, it must calculate its average CMH using the modified calculation in MIFIDPRU TP 4.11R(1) with the following adjustments:

  1. (1)

    in MIFIDPRU TP 4.11R(1)(b), n is the relevant number of months for which the firm has been holding CMH (with the month during which the firm begins that activity counted as month zero);

  2. (2)

    during month zero of the calculation, the firm must:

    1. (a)

      use a best efforts estimate of expected CMH for that month based on the firm’s projections when beginning the new activity; and

    2. (b)

      use the estimate in (a) as its average CMH;

  3. (3)

    during month 1 of the calculation and each month thereafter, the firm must apply the approach in (1) using observed historical data from the preceding month;

  4. (4)

    the modified calculation ceases to apply on the date that falls 9 months after the date on which the firm began holding CMH.

MIFIDPRU 4.8.16G
  1. (1)

    1Under MIFIDPRU 4.8.13R(1), a firm must measure its CMH at the end of each business day. The relevant amount should reflect any subsequent adjustment that the firm must apply as a result of any requirement to carry out internal reconciliations in relation to client money (for example, under CASS 7.15). Therefore, where an internal reconciliation subsequently identifies that the amount of CMH recorded for a particular business day is incorrect, the firm should update the relevant amount to reflect the correct figure.

  2. (2)

    Where the K-CMH requirement applies on a consolidated basis, the guidance in (1) also applies in relation to any reconciliations carried out in accordance with the requirements of the jurisdiction in which any third country entity included in the consolidated situation is based.