6.4.1 - CASS Provision

CASS Anatomy™ Go Premium Template:CASS Section 6.4.1 (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 This resource therefore may well be out of date, even if it was accurate once, which it might not have been.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.

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.

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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

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Settlement fails and shortfalls... express prior consent

The Jolly Contrarian's firm view is that shortfalls arising through settlement fails in an omnibus account are not covered by “omnibus use” in 6.4.1(2) and therefore do not require a client’s express prior consent:

• Shortfalls arising as a result of inbound settlement failures are not in the nature of deliberate, or even really “inadvertent” use of client assets: They are shortfalls arising as a result of complying with client instructions on their own assets, and are 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.
• There is no mention of “inadvertent” use in CASS 6.4.1.
• If one accepts that a shortfall is not a “use” per se (inadvertent or otherwise), then a non-compliant use under CASS 6.4.1 sounds like an operational failure or contractual breach whereby the custodian (intentionally) uses assets wrt which it had no permission from the client to use.
• 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.”