The banking exemption - CASS Provision

CASS Anatomy™ Go Premium 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 This resource therefore may well be out of date, even if it was accurate once, which it might not have been.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 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.

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.
  • The broker will book the order against the underlying client directly and not against “investment manager as trustee for Client XYZ”.
  • Therefore, at the moment when the investment manager pays the “client money” to the broker, the investment manager ceases to hold it as client money at all, but pays the cash to discharge the client’s obligation to the broker (again, see CASS 7.11.25).

Discussion

This is a transliteration, verbatim, of the old CASS 7.1.8A.