Treatment of shortfalls - CASS Provision: Difference between revisions

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''Here is {{ps14/9}}, which explains much of the [[great CASS rewrite]].''
''Here is {{ps14/9}}, which explains much of the [[great CASS rewrite]].''


The following is being introduced to the CASS rules as of 1 June 2015 - essentially, upon a shortfall arising a custodian or prime broker must set aside “{{fcaprov|applicable assets}}” in a custody account to cover the potential loss each client would suffer if it were to go insolvent before resolving the shortfall.
Upon a shortfall arising a [[custodian]] or [[prime broker]] must set aside “{{fcaprov|applicable assets}}” in an [[omnibus]] custody account to cover the potential loss each client would suffer if the [[custodian]] were to go [[insolvent]] before resolving the shortfall.
===And this could happen how, exactly?===
Given typical [[omnibus]] structure where:
*a counterparty to a hedge fund fails to settle an open trade into that HF's {{tag|prime broker}}; while simultaneously
*the {{tag|prime broker}} delivers a quantity of the same security to the market on behalf of a different hedge fund customer, relying to do so on that first purchase trade settling as intended ..
*there may be a temporary [[shortfall]] in the prime broker’s omnibus client custody account, pending resolution of the [[fail]].  


Given typical [[omnibus]] [[segregation]], where counterparty to a [[prime brokerage]] customer fails to settle into the {{tag|prime broker}} while simultaneously the {{tag|prime broker}} delivers a quantity of the same security out on behalf of a different customer, but in reliance on the purchased asset coming in, a [[shortfall]] will happen. Usually it will be quickly remediated, but where not (probably 3-5 business days) the [[PB]] will, under the new rules, need to take some action to mitigate the credit exposure its customers have to it as a result of the shortfall.
Usually the [[fail]] will be quickly remedied, but if it isn’t the [[PB]] must take action to reduce its customers’ credit exposure as a result of the shortfall. It does this by putting its own assets (or money) aside, on trust for the affected clients.


{{nuts|CASS|6.6.54}}
{{nuts|CASS|6.6.54}}
==={{cassprov|Qualifying money market fund}}s to fulfill the shortfall?===
Setting aside cash can be expensive init so vigilant [[prime broker]]s may wish to deploy [[money market funds]]. This they can do if they comply with the particular rules as to {{cassprov|qualifying money market fund}}s, including (casasprov|7.13.28}} the client having the right to say no to such an arrangement.


{{seealso}}
{{seealso}}
*The [[great CASS rewrite]]
*The [[great CASS rewrite]]
*{{ps14/9}}
*{{ps14/9}}

Revision as of 17:14, 18 September 2017

CASS Anatomy™


Template:CASS Section 6.6.54

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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

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Here is FCA Policy Statement PS14/9, which explains much of the great CASS rewrite.

Upon a shortfall arising a custodian or prime broker must set aside “applicable assets” in an omnibus custody account to cover the potential loss each client would suffer if the custodian were to go insolvent before resolving the shortfall.

And this could happen how, exactly?

Given typical omnibus structure where:

  • a counterparty to a hedge fund fails to settle an open trade into that HF's prime broker; while simultaneously
  • the prime broker delivers a quantity of the same security to the market on behalf of a different hedge fund customer, relying to do so on that first purchase trade settling as intended ..
  • there may be a temporary shortfall in the prime broker’s omnibus client custody account, pending resolution of the fail.

Usually the fail will be quickly remedied, but if it isn’t the PB must take action to reduce its customers’ credit exposure as a result of the shortfall. It does this by putting its own assets (or money) aside, on trust for the affected clients.

6.6.54 in a Nutshell™ (CASS edition)

CASS 6.6.54R applies where there is an unresolved shortfall. Until it is resolved the firm must:

If the shortfall is a third party’s fault the firm must take all reasonable steps to quickly resolve the situation. Until it is resolved the firm must consider whether it should notify the affected clients, and may take steps for the treatment of shortfalls until that discrepancy is resolved.

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Qualifying money market funds to fulfill the shortfall?

Setting aside cash can be expensive init so vigilant prime brokers may wish to deploy money market funds. This they can do if they comply with the particular rules as to qualifying money market funds, including (casasprov|7.13.28}} the client having the right to say no to such an arrangement.

See also

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