Treatment of shortfalls - CASS Provision: Difference between revisions

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-{{fullanat|cass|6.6.54|}}
+{{a|cass|{{nuts|CASS|6.6.54}}}}''The equivalent provision under CASS 7 (for {{t|client money}} discrepancies) is CASS {{cassprov|7.15.29}}''<br>
+The famous [[CASS shortfalls]] provision: should you have some settlement fails into your [[custody]] business — quite likely, if you offer [[contractual settlement]] — such that at any time you hold fewer [[custody asset]]s than your records suggest you ought to, you must put aside your own[[cash]] or [[assets]] to cover that [[shortfall]], and mark it to market until the shortfall is resolved, to mitigate your client’s exposure.
+Yours truly reads that to mean you cannot simply put aside some of your own assets and grant a security interest over those assets in favour of clients, thereby maintaining legal ownership of them, even though that is plainly the most sensible way to resolve the implied credit risk to yourself presented by a temporary shortfall which you expect quickly to resolve. No, you must actually [[Title transfer|pass title]] to those assets outright to the clients, but somehow confect an unspecified reversionary right to the assets which, in the theory, you no longer own, should the happy day come — expected to be tomorrow — when the shortfall is resolved.
+Giving clients outright ownership of assets they didn’t ask for and didn’t really want seems an odd tool to pick from the box, but there you have it. Life wasn’t meant to be easy.
 ''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 hedge fund’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 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 {{t|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.
+==={{cassprov|Qualifying money market fund}}s to fulfill the [[Shortfall - CASS Provision|shortfall]]?===
+Setting aside cash with [[client money bank|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).
+You could apply [[money market fund|money market funds]] to plug a shortfall ''without'' relying on the client money rules and all this “qualifying” malarkey: 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}}.
+===Careful when mixing client money and client assets===
+Client money behaves differently to client assets when entities start going bust. In a nutshell, unless you have set up separate pools, client money losses are mutualised across all clients benefiting from client money protection; client asset losses  are (a) a lot less likely—even if your custodian has blown up you ''should'' still get all your custody assets back (unless there is a shortfall!), and (b) even where you don’t, and the assets have somehow been lost or stolen, losses are mutualised across only those clients who had an interest in the particular [[ISIN]] which has been lost.
-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.
+Another weird outcome is that if you have posted [[client money]] against a [[Treatment of shortfalls - CASS Provision|custody shortfall]], and there is a [[secondary pooling event]] amongst your client money banks, that shortfall cash will be mutualised across all beneficiaries of client money across your organisation—it isn’t pegged away and held for the poor punter suffering the shortfall.
-{{nuts|CASS|6.6.54}}
+===But sir sir what about CASS {{cassprov|6.4.1}}?===
+{{Inadvertent use}}
-{{seealso}}
+{{sa}}
 *The [[great CASS rewrite]]
 *{{ps14/9}}