CASS Anatomy

Client money

Generally, there are two reasons you might pay money to someone else under a contract:

The general case

Because you are obliged to pay it to him under the contract.

In some cases (for example a CSA or even a loan) the payee might in turn have an obligation to pay some money back to you. But you are exposed to the payee's credit risk in the mean time: you are his creditor.
This general case does not involve handling client money.
You could say this is “title transfer” of cash, but you don't need to, because cash is special: title to cash, by definition, passes by delivery.

The special case

Because you want him to look after it for you under the contract.

Here, you don't owe the payee anything, and the only contract you have with the person arises because he's agreed to look after the money for you.
This special case is a sort of safekeeping: it is a regulated activity. In the UK it is regulated by the FCA under the Client Asset Sourcebook (fonldly known as the CASS rules).
Now this special case creates a metaphysical problem, because when you look after something, you're not meant to take ownership of it. You're just a custodian. But as noted above, you can't "just look after" someone else's cash: Casg is special. Just by holding it, you own it.
This necessitates two things:
- First: A person agreeing to look after your money can't keep it: they have to pass it on to someone else to look after 0 and therefore
- Second: Since - hang on - that creates an infinite regression doesn't it? - there needs to be one class of special people who are allowed to look after your money by keeping it for themselves but promising to pay it back when you want it.
- And so, lo and behold there are: This special class of people are banks.
- You are exposed to the credit risk of banks, but as we all now know banks are carefully regulated, well capitalised, immune from contagion and entirely appropriate places to look after your money.

In a Nutshell™ then?

Anyone can borrow some money off you; only someone special can hold your money for you. Everyone else has to look after your money by giving it to a bank to hold for you in your name. In that case there is no debtor/creditor relationship with the payee as long as the payee promptly transfers the cash on to a bank with whom you will have a debtor/creditor relationship. Note this is also title transfer (you can’t not title transfer cash), but within a prescribed period, the transfer goes to a third party bank. (if the intermediary were to go insolvent in the mean time it's tough luck).

Banks

Deposit-taking credit institutions benefit from the general “banking exemption” from the obligation to hold money on behalf of clients subject to the client money rules. A bank may hold cliient money as banker and not trustee.

Delivery versus payment

Note that transactions that are settled DVP do not usually involve the holding money on a client's behalf at all: (instead the client would be paying the broker either as its contractual counterparty, where the broker acts as principal, or in settlement of the client's obligation to reimburse the broker for moneys it jhas already disbursed on the client's behalf (in acquiring the stock in the first place), where the broker acts as agent).

Even without the general banking exemption, the obligation to hold fclient money only arises after a certain period (generally longer than the period for which a broker would expect to be holding money in case)

There are specific exemptions from the obligation to hold as client money relating to delivery versus payment transactions.

This is an anatomy of the CASS Rules in the FCA Sourcebook.