Treatment of shortfalls - CASS Provision

CASS Anatomy™ Go Premium Template:CASS Section 6.6.54 (View Template) 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 This resource therefore may well be out of date, even if it was accurate once, which it might not have been.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.

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.

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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.

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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

• The great CASS rewrite
• FCA Policy Statement PS14/9