Treatment of shortfalls - CASS Provision

Here is the FCA Policy Statement PS14/9

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.

in a Nutshell™:

CASS 6.6.54 R applies where there is an unresolved shortfall.

(1) Until it is resolved, the firm must either:

(a) hold enough applicable assets to cover the shortfall and, in doing so:

(i) separate the applicable assets from the firm’s own property, recording them in its client-specific safe custody asset record as being held for the relevant client;

(ii) record the shortfall, the relevant clients, and the applicable assets the firm has appropriated; and

(iii) update that record whenever the discrepancy is resolved; or

(b) hold enough money to cover the shortfall as client money and, in doing so:

(i) ensure it is segregated and recorded as being held for the relevant client;

(ii) record the shortfall, the relevant clients, and amount of money the firm has appropriated; and

(iii) update that record whenever the discrepancy is resolved; or

(c) a combination of the two.

(3) If another person is responsible for the discrepancy then 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 under (2) for the treatment of shortfalls until that discrepancy is resolved.

Template:CASS Section 6.6.54 (View Template)

CASS Anatomy™ Go Premium {{{2}}} 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 This resource therefore may well be out of date, even if it was accurate once, which it might not have been.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.