6.4.1 - CASS Provision

CASS Anatomy™ Go Premium 6.4.1 in a Nutshell™ (cass edition) 6.4.1 (1) General restriction on reuse: A firm may not use custody assets for securities financing transactions, or otherwise use those assets for its own account or any one else’s, unless: (a) the client has given express prior consent to their use on specified terms; and (b) the firm only uses them on those specified terms. 6.4.1(2) Omnibus accounts: A firm may not use custody assets for securities financing transactions that it holds on a client’s behalf in an omnibus account held by a third party, or otherwise use custody assets held in such an account for its own or any one else’s account unless, in addition to (1): (a) each affected client in the omnibus account has given express prior consent as above; or (b) the firm has in place systems to ensure that only assets belonging to those clients who have given express prior consent are used. 6.4.1(3) express prior consent of a retail client under this rule means the retail client’s signature (or equivalent). view template IMPORTANT: CASS changed quite a bit after MiFID II. This resource therefore may well be out of date, even if it was accurate once, which it might not have been. This is an article about the FCA’s custody and client money rules — client assets — and is fondly known by its chapter in the FCA SourcebookTable of Contents | 1 | 1A | 3 | 5 | 6 (custody rules) | 7 (client money rules) | 7A | 8 | 9 (PBDA) | 10 Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.

“Arrangements for securities financing transactions in respect of safe custody assets held by it on behalf of a client” means agent lending facilities. This is not rehypothecation. Compare with Art 22(7) of UCITS: This is the only exception to the use of assets, also for agent lending purposes.

The remainder — “... or otherwise use safe custody assets held in such an account for its own account or for the account of any other person” is more like PB style rehypothecation.

This doesn’t seem to have changed under MiFID 2. Except for being clear about the means for evidencing “express prior consent” which one would like to think is the same as “prior express consent” - a term used elsewhere in MiFID II, but then again one would like to think they could have used the SAME GODDAMN EXPRESSION IN ALL PLACES, wouldn’t one?

But sir sir what about shortfalls?

Warning: tedious passage approaching
The Jolly Contrarian’s view is that shortfalls arising through settlement failures into an omnibus account are covered by CASS 6.6.54 and are not an example of “omnibus use” in 6.4.1(2) and therefore do not require a client’s express prior consent:

• Shortfalls arise as a result of inbound settlement failures. There is no question of using one clients assets (even inadvertently) to satisfy another’s obligations. The custodian correctly transfers out the account a client’s own assets in accordance with that client’s instructions. A subsequent settlement failure into the account results in the omnibus account being underfunded — there is a “shortfall”. This is not in the nature of deliberate, or even “inadvertent” use of client assets: it is (instead) covered by the Shortfalls language introduced after PS14/9 by CASS 6.6.54 R.
• As shortfalls, they have been subject to comprehensive review (PS14/9) and detailed specific provisions (CASS 6.6.54R) which do not require prior express consent.
• The “express prior consent” requirement of 6.4.1 applies to all clients (not just retail ones – simply the earlier text specified precisely how that prior express consent was to be evidenced for retail clients) has substantively been in place since 2007 (MiFID I) and was not materially been changed either by PS 14/9 or MiFID II.
• The meaning of “prior express consent” in the context of MiFID was discussed by then regulator CESR in 2007 a discussion paper (albeit in the context of best execution) and said: “Where MiFID requires “prior express consent”, CESR considers that this entails an actual demonstration of consent by the client which may be provided by signature in writing or an equivalent means (electronic signature), by a click on a web page or orally by telephone or in person, with appropriate record keeping in each case.”