Requirement to protect clients' safe custody assets - CASS Provision

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CASS Anatomy

Template:CASS Section 6.2.1

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 This resource therefore may well be out of date, even if it was accurate once, which it might not have been.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 Sourcebook Table of Contents | 1 | 1A | 3 | 5 | 6 (custody rules) | 7 (client money rules) | 7A | 8 | 9 (PBDA) | 10

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Under CASS 6.2.1 R, a firm is subject to an obligation “when holding safe custody assets belonging to clients” to “make adequate arrangements so as to safeguard clients'ownership rights, especially in the event of the firm's insolvency, and to prevent the use of safe custody assets belonging to a client on the firm's own account except with the client's express consent”.

CASS 6.1 (which deals with the general application of the custody rules in CASS 6) contains a provision (CASS 6.1.4R) which states that: “The custody rules do not apply where a firm carries on business in its name but on behalf of the client where that is required by the very nature of the transaction and the and the client is in agreement”.

This rule recognises that transactions sometimes need to be undertaken on behalf of clients in the firm's own name (for example because the relevant counterparty might have issues about the client's creditworthiness) and that this may result in the firm having to hold relevant assets in proprietary accounts. The rule therefore appears potentially to cover the situation where the firm acquires assets as agent for an undisclosed principal and where, as a result, the transaction is required to settle temporarily into the firm's proprietary accounts (before the relevant assets are transferred to the client's custody account).

6 - Custody rules

6.1 Application
6.2 Holding of client assets

6.2.1 Requirement to protect clients' safe custody assets
6.2.2 Requirement to have adequate organisational arrangements
6.2.3 Registration and recording of legal title
6.2.4 (Nominee companies)
6.2.5 Recording title to safe custody assets
6.2.6 (Adequate investigations)
6.2.7 (documents of title to bearer assets)

6.3 Depositing assets and arranging for assets to be deposited with third parties

6.3.1 - Criteria for depositing assets with a third party
6.3.2 - Considerations when discharging obligations under this part
6.3.3 - Issues firms should address in their agreements with third party custodians
6.3.4 - Suitable jurisdictions for the deposit of safe custody assets
6.3.4A - Third-party custody agreements
6.3.4B - Third-party custody agreements
6.3.5 - Agreements with third party custodians not to contain security interests ...
6.3.6 - ... er, except in the following cases
6.3.7 - When a firm is considered to be acting on the instructions of a professional client
6.3.8 - Safe custody asset includes client money
6.3.9 - And don't think this provision allows a right of set-off

6.4 Use of safe custody assets
Template:CASS Section 6.5 TOC 6.6 Template:Records, accounts and reconciliations (From 1/6/2015)

6.6.54 Treatment of shortfalls