Treatment of shortfalls - CASS Provision
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CASS Anatomy™
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Here is FCA Policy Statement 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 “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.
Given typical omnibus segregation, where counterparty to a prime brokerage customer fails to settle into the prime broker while simultaneously the 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.
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.