The banking exemption - CASS Provision

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CASS Anatomy


To see the current text of CASS 7.10 in the FCA handbook, click here.

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 This resource therefore may well be out of date, even if it was accurate once, which it might not have been.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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History: This is a transliteration, verbatim, of the old CASS 7.1.8A.

The mandatory notification

If you intend to use the banking exemption, you must first tell your client that

The rule (CASS 7.10.19 doesn’t prescribe a particular form for that notification but expect legal eagles — or legal chicken lickens — to insist on the somewhat laborious text in that rule.

Note: if you are providing client money protection, you are not obliged to tell clients that the client money distribution and transfer rules will apply: it can be a nice surprise to them, when the bank for whom you work has unexpectedly imploded and you are wandering around outside with your belongings in an Iron Mountain box. (But your spoilsport legal eagles might insist you tell them anyway.)

And a “bank” is?

You’ll think it was easy, and — if you rise above the guff — it is: a bank is, well, a bank: a regulated, officially permissioned[1] deposit-taking institution. But of course it is too easy to just say that.

So, for the purpose of figuring out whether your deposit ought to be protected under CASS client money rules, or whether you are free to not have to offer client money protection, you are deposit with a “CRD credit institution” or any money held by an “approved bank” that is not a CRD credit institution relating to designated investment business. An “approved bank” is (sigh) a bank or a CRD credit institution or a building society or a central bank yadayadayada — and a bank is an institution with Part 4 permissions to accept deposits in the UK.

A CRD credit institution is an EEA credit institution authorised under the CRD.

Banks

Deposit-taking credit institutions and “approved banks” benefit from the general “banking exemption” and do not have to offer client money protection – see CASS 7.10.16 - 7.10.19 — but may do so if they wish, or their clients insist.

But they may well find it is quite painful and difficult to do, seeing as the one thing banks like to do most — that is, taking cash in and onto their balance sheet — is the one thing[2] a provider of client money protection may not do.

That won’t stop certain ETD clients — especially UCITS funds who can’t have credit exposure to single entities, not even banks — insisting that their initial margin is held as client money and thereby diversified.

Client money and cash brokerage

Should an investment manager ask an executing broker bank to offer it client money protection, consider the following:

  • regulated credit institutions (Banks, to you and me) are not required to hold customer cash as client money under the CASS rules (CASS 7.10.16) – banks hold “as banker” and not as trustee for their clients.
  • If a bank were to treat cash as client money (it could in theory do this, though it doesn't make a lot of sense):
    • The bank would have to deposit the cash with another bank — in practice a diversified network of them — cue operational mayhem.
    • The client would still, ultimately, be exposed to those other banks, just not the immediate one. Cash is always presents a credit risk to whoever holds it for the time being.
  • Brokers generally settle cash equities transactions delivery versus payment under their terms of business. Clients will not pay any money in advance receiving their settlement securities. Therefore the client’s payment obligation is in discharge of its contractual liability to the broker, so is not a “client money” obligation in the first place (see CASS 7.11.25);
  • When an investment manager instructs a broker to execute an order for a client it does so as agent for the client, but in the client’s own name.
  1. In its own jurisdiction.
  2. Well, all right, it is one of the thousands of things a client money provider may not do.