Recording title to safe custody assets - CASS Provision

CASS Anatomy™ Go Premium Template:CASS Section 6.2.5 (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 This resource therefore may well be out of date, even if it was accurate once, which it might not have been.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 provision was reworked in the great CASS rewrite of 2015. Here’s what PS14/9 had to say about it:

General statement

PS14/9 on the general vibe of this new rule:

“where a firm is acting for a proprietary purpose, it should be registering its proprietary assets in a separate name to the name in which it registers any custody assets it holds for a client.”

“We are introducing this general restriction for two reasons. The first reason is to reduce the risk of custody assets being misappropriated, or client’s rights in those assets being lost or diminished. [...] allowing a firm to register or record legal title to its own applicable assets and custody assets under the same nominee name poses risks to those client assets – for example, an increased risk that the client’s assets may not be separately identifiable from the firm’s own assets, thereby delaying the return of custody assets and reducing client protection. The second reason is to increase the likelihood that the firm or an IP would be able to transfer client assets promptly before or after the failure of a firm to another entity.”

Incidental to designated investment business

PS14/9 again:

“First, where doing so arises incidentally to the investment business the firm carries on for the account of a client or to other steps taken by the firm to comply with the custody rules. We are also providing guidance to indicate that each of the situations discussed below are likely examples of where these conditions would be met.”

“There are a number of situations in which a firm may need to hold its own assets in the same name as the custody assets belonging to clients to facilitate, or as a result of, a transaction for a client, such as:

• correcting dealing or transaction errors that relate to client positions [...] to reverse the transaction and/or correct the error);
• processing or allocating assets for bulk deals (e.g. as a rounding mechanism when offering aggregated dealing services);
• maintaining a small balance of the firm’s own assets for purely operational or compliance purposes (e.g. as a float to cover custody breaks);
• allowing clients to trade in fractional shares or units and when processing corporate actions attributable to a client’s fractional entitlement; and
• making good a shortfall in custody assets with a firm’s own assets.”

Law and Market practice outside the UK

In PS14/9 the FCA recognises you cannot regulate for far-flung jurisdictions. It is all very well requiring all sub-custodians to segregate client assets from their, and your, own and hold them in nominee accounts and so on, but if, in a far-flung jurisdiction, this is not legally permissible or, as a matter of course, local sub-custodians simply don’t do this — hence reference to “market practice” — you are rather in a cleft stick. The FCA rules are, here pragmatic.

“It is often the case that where a firm uses a sub custodian in a particular overseas market that recognises nominee registration, it is likely that the sub custodian will register both the firm’s own assets and any custody assets the firm held through that sub custodian in the same nominee name.”