Treatment of shortfalls - CASS Provision: Difference between revisions
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==={{cassprov|Qualifying money market fund}}s to fulfill the shortfall?=== | ==={{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]]. | Setting aside cash with client money banks can be expensive init so vigilant [[prime broker]]s may wish to deploy [[money market funds]]. If they wish to do this as [[client money]] under [[CASS 7]] they must comply with the particular rules as to {{cassprov|qualifying money market fund}}s, including (cassprov|7.13.28}} (under which the client has the right to decline such an arrangement). But why would you want to do it as client mooney? Client money is a pain in the backside. And the good news is you ''don’t'' have to: CASS {{cassprov|6.6.54}} allows a [[custodian]] to set aside its own assets, so one could deposit [[money market funds]] as [[Custody assets|custody]] under CASS 6, and would not be subject to the ''qualifying'' money market funds regime which only applies under CASS {{cassprov|7}}. | ||
===But sir sir what about CASS {{cassprov|6.4.1}}?=== | ===But sir sir what about CASS {{cassprov|6.4.1}}?=== |
Revision as of 17:17, 17 July 2018
CASS Anatomy™
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The equivalent provision under CASS 7 (for client money discrepancies) is CASS 7.15.29
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 hedge fund’s prime broker; while simultaneously ...
- the prime broker delivers a quantity of the same security to the market on behalf of a different 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 prime broker must 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:
- segregate and hold sufficient money or applicable assets in custody to cover the shortfall away from its own property;
- record the shortfall, the relevant clients, and the relevant money and applicable assets being held, and
- update that record as soon as the discrepancy is resolved.
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.
Qualifying money market funds to fulfill the shortfall?
Setting aside cash with client money banks can be expensive init so vigilant prime brokers may wish to deploy money market funds. If they wish to do this as client money under CASS 7 they must comply with the particular rules as to qualifying money market funds, including (cassprov|7.13.28}} (under which the client has the right to decline such an arrangement). But why would you want to do it as client mooney? Client money is a pain in the backside. And the good news is you don’t have to: CASS 6.6.54 allows a custodian to set aside its own assets, so one could deposit money market funds as custody under CASS 6, and would not be subject to the qualifying money market funds regime which only applies under CASS 7.
But sir sir what about CASS 6.4.1?
Warning: tedious passage approaching
The Jolly Contrarian’s view is that shortfalls arising through settlement failures into an omnibus account are covered by CASS 6.6.54 and are not an example of “omnibus use” in 6.4.1(2) and therefore do not require a client’s express prior consent:
- Shortfalls arise as a result of inbound settlement failures. There is no question of using one clients assets (even inadvertently) to satisfy another’s obligations. The custodian correctly transfers out the account a client’s own assets in accordance with that client’s instructions. A subsequent settlement failure into the account results in the omnibus account being underfunded — there is a “shortfall”. This is not in the nature of deliberate, or even “inadvertent” use of client assets: it is (instead) covered by the Shortfalls language introduced after PS14/9 by CASS 6.6.54 R.
- As shortfalls, they have been subject to comprehensive review (PS14/9) and detailed specific provisions (CASS 6.6.54R) which do not require prior express consent.
- The “express prior consent” requirement of 6.4.1 applies to all clients (not just retail ones – simply the earlier text specified precisely how that prior express consent was to be evidenced for retail clients) has substantively been in place since 2007 (MiFID I) and was not materially been changed either by PS 14/9 or MiFID II.
- The meaning of “prior express consent”[1] in the context of MiFID was discussed by then regulator CESR in 2007 a discussion paper (albeit in the context of best execution) and said: “Where MiFID requires “prior express consent”, CESR considers that this entails an actual demonstration of consent by the client which may be provided by signature in writing or an equivalent means (electronic signature), by a click on a web page or orally by telephone or in person, with appropriate record keeping in each case.”
See also
- ↑ Is it the same thing as express prior consent though???