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{{a|cass|{{image|CASS Garb|png|A [[CASS operational oversight function|CASS officer]]’s ceremonial [[mithril]] gown, yesterday.}} | |||
}}The [[FCA]]’s [[client money rules]] are designed to minimise credit exposure to firms which hold client funds, but who are not themselves regulated banks. Such firms must deposit client funds with an {{cassprov|approved bank}} which record the deposits in the firm’s name but belonging to the firm’s clients, so it is clear that the firm has no proprietary claim on the account. Therefore, the [[client money]] account is isolated the firm’s creditors on the firm’s insolvency (such a failure a “[[primary pooling event]]”). It is not isolated, however, from the [[client money bank]]’s creditors. | |||
===How is [[client money]] different to ordinary [[cash]]?=== | |||
It isn’t. [[Cash]] is [[cash]] is [[cash]]. “[[Client money]]” describes the relationship between the giver and the receiver of [[cash]], not the cash itself. The cash itself, as it moves around, is just [[cash]]. | |||
You can’t encumber [[cash]], as a matter of basic banking [[ontology]]. [[Cash]] is special. It is unlike any other [[financial instrument]]. You can’t deal with your interests in [[cash]]. You can hold it, or pass it, and that’s it. Whoever physically holds cash, “owns it” against the rest of the world for all purposes. | |||
So at the moment a client’s [[cash]] hits a [[broker]]’s [[client money]] bank account, ''neither the client nor the broker holds the cash. The bank does''. | |||
Therefore: | |||
*As between client and [[broker]] it is [[client money]]. | |||
*As between client and the [[client bank]] it is [[indebtedness]]. | |||
*From the [[client bank]]’s perspective it is [[working capital]] that the bank can lend out as it could any [[cash]] on its [[balance sheet]]. | |||
Then the [[broker]] instructs the [[client money|client money bank]] to pay some cash to an [[intermediary]]. Now: | |||
*As between the [[broker]] (as [[trustee]] for the client) and the [[intermediary]], it is [[indebtedness]]. | |||
*From the intermediary’s perspective it is [[working capital]] the [[intermediary]] can use as it sees fit. | |||
*If the intermediary deposits the cash with its own bank, it as between intermediary and bank it is [[indebtedness]] and in that bank’s own hands [[working capital]] etc. | |||
OK: curly scenario: here the original [[broker]] instructs the [[client money|client money bank]] to pay some cash to an intermediary who is, in turn, subject to its ''own'' client money regime and deposits it with its own separate client money bank.<ref>For example, HK or Singapore.</ref> Here: | |||
*As between [[broker]] and [[intermediary]] is it “local [[client money]]” as neither of them hold it but the local bank does | |||
*As between the local bank and the [[intermediary]] who is acting as trustee for the [[broker]] (who in turn is acting as [[trustee]] for the client) it is [[indebtedness]] | |||
*In the local bank’s hands it is [[working capital]]. | |||
===When do client money obligations arise?=== | |||
Generally, there are two reasons you might pay money to someone else: <br> | |||
'''The general case, where [[client money]] does ''not'' apply''': ''Because you owe it under a contract.'' | |||
*In some cases (for example a {{tag|CSA}} or even a [[loan]]) the payee might in turn have to pay some money back to you at a later date. But you are exposed to the payee’s credit risk in the mean time: you are a '''creditor'''. | |||
*This general case does '''not''' involve [[client money]] (see {{tag|CASS}} {{Cassprov|7.11.25}}). | |||
*You could say this is “title transfer” of [[cash]], but you don’t need to, because all delivery of cash it title transfer. There ''is'' no title to cash. <br> | |||
'''The special case where [[client money]] ''might'' apply''': ''Because you want your counterparty to look after it for you, in connection with some other service — {{fcaprov|designated investment business}} for example (there are many others) — it is providing you.'' As to this, see CASS {{cassprov|7.10.1}}, the applicability of the client money rules. The key phrase is not “in connection with designated investment business”, but “money received for and on behalf of a client”. That implies an agency, trust or banking kind of role, and is quite different from “money ''owed'' to a client”, which implies an outright contractual obligation. Agency, trust and banking doesn’t happen all that often in connection with designated investment business — ''unless you are acting as an [[agent]], [[trustee]] or [[bank]]''. | |||
*Here, you don’t owe the payee anything. The only contract you have arises because it has agreed to look after your money for you. | |||
*This special case is a sort of safekeeping: it is a regulated activity. In the UK it is regulated by the {{tag|FCA}} under the [[Client Asset Sourcebook]] (fondly known as the {{tag|CASS}} rules). | |||
*Now this special case creates a [[Metaphysics|metaphysical]] problem, because when you look after something, you’re not meant to take ownership of it. You’re just a {{tag|custodian}}. But as noted above, you ''can’t'' “just look after” someone else’s cash. | |||
*This necessitates two things: | |||
**''First'': A person agreeing to look after your money can’t keep it: it must pass it on to someone else to look after, and since — hang on: that creates an infinite regression doesn’t it? — therefore... | |||
**''Second'': 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: they are called '''{{tag|bank}}s'''. | |||
**When you deposit your money with a bank you have its credit risk. But, as we all now know, banks are special: they’re carefully regulated, well capitalised and generally designed to be appropriate places to look after your money. | |||
{{client money and banks}} | |||
{{client money and cash brokerage}} | |||
===[[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. | |||
{{sa}} | |||
*[[Mithril]] | |||
*[[Cash]] | |||
*[[Bitcoin]] | |||
{{ref}} | |||