Custody: MiFID business

Part

CASS Client Assets Sourcebook

Chapter

Custody: MiFID business

Printed on: 14/10/2024

Rulebook at: 06/05/2008

CASS 6

Custody: MiFID business

CASS 6.1

Application

01/11/2007

CASS 6.1.1

This chapter (the custody rules) applies to:

(1) a MiFID investment firm:

(a) when it holds financial instruments belonging to a client in the course of its MiFID business; or
(b) that opts to comply with the custody rules under this chapter in accordance with CASS 6.1.17R (1) (Opt-in to the MiFID custody rules); and

(2) a third country investment firm that opts to comply with the custody rules under this chapter in accordance with CASS 6.1.17R (2) (Opt-in to the MiFID client money rules).

01/11/2007

CASS 6.1.2

Firms are reminded that dividends (actual or payments in lieu), stock lending fees and other payments received for the benefit of a client, and which are due to the clients should be held in accordance with the MiFID client money chapter where appropriate.

01/11/2007

CASS 6.1.3

This chapter does not apply where a firm issues depositary receipts. The custody rules in the non-directive custody chapter provide a specialist regime for the issue of depositary receipts (see CASS 2.1.24 R to CASS 2.1.26 R).

01/11/2007

Business in the name of the firm

CASS 6.1.4

The custody rules do not apply where a firm carries on business in its name but on behalf of the client where that is required by the very nature of the transaction and the client is in agreement.

[Note: recital 26 to MiFID]

01/11/2007

CASS 6.1.5

For example, this chapter does not apply where a firm borrows financial instruments from a client as principal under a stock lending agreement.

01/11/2007

Title transfer collateral arrangements

CASS 6.1.6

The custody rules do not apply where a client transfers full ownership of a financial instrument to a firm for the purpose of securing or otherwise covering present or future, actual, contingent or prospective obligations.

[Note: recital 27 to MiFID]

01/11/2007

CASS 6.1.7

A title transfer financial collateral arrangement under the Financial Collateral Directive is a type of transfer of instruments to cover obligations where the financial instrument will not be regarded as belonging to the client.

01/11/2007

CASS 6.1.8

Firms are reminded of the client's best interests rule, which requires them to act honestly, fairly and professionally in accordance with the best interests of their clients when structuring their business particularly in respect of the effect of that structure on firms' obligations under this chapter.

01/11/2007

CASS 6.1.9

Firms are reminded that, in certain cases, the collateral rules apply where a firm receives collateral from a client in order to secure the obligations of the client.

01/11/2007

Affiliated companies

CASS 6.1.10

The fact that a client is an affiliated company does not affect the operation of the custody rules in relation to that client.

01/11/2007

CASS 6.1.11

A firm that holds financial instruments on behalf of an affiliated company in respect of its non-MiFID business and opts under CASS 6.1.17 R to comply with this chapter in respect of that non-MiFID business, should refer to CASS 2.1.9 R (1) to determine whether the assets falls within the scope of the custody rules in the non-directive custody chapter and therefore within the scope of the opt-in.

01/11/2007

Delivery versus payment transactions

CASS 6.1.12

(1) A firm need not treat this chapter as applying in respect of a delivery versus payment transaction through a commercial settlement system if it is intended that the financial instrument is either to be:

(a) in respect of a client's purchase, due to the client within one business day following the client's fulfilment of a payment obligation; or
(b) in respect of a client's sale, due to the firm within one business day following the fulfilment of a payment obligation;

unless the delivery or payment by the firm does not occur by the close of business on the third business day following the date of payment or delivery of the financial instrument by the client.
(2) Until such a delivery versus payment transaction through a commercial settlement system settles, a firm may segregate money (in accordance with the MiFID client money chapter) instead of the client's financial instruments.

01/11/2007

Arranging registration and recommendations

CASS 6.1.13

This chapter does not apply where a firm arranges registration of a financial instrument. In such circumstances, a firm must comply with the relevant custody rules in the non-directive custody chapter (see CASS 2.1.22 R).

01/11/2007

CASS 6.1.14

This chapter does not apply where a firm recommends to a retail client a third party to hold the assets of that client. In such circumstances, a firm must comply with the relevant custody rules in the non-directive custody chapter (see CASS 2.2.19 R).

01/11/2007

Temporary handling of financial instruments

CASS 6.1.15

The custody rules do not apply if a firm temporarily handles a financial instrument belonging to a client. A firm should temporarily handle financial instrument for no longer than is reasonably necessary. In most transactions this would be no longer than one business day, but it may be longer or shorter depending upon the transaction in question. For example, when a firm executes an order to sell shares which have not been registered on a de-materialised exchange, handling documents for longer periods may be reasonably necessary. However, in the case of financial instruments in bearer form, the firm is expected to handle them for less than one business day. When a firm temporarily handles financial instruments, it is still obliged to comply with Principle 10 (Clients' assets).

01/11/2007

CASS 6.1.16

When a firm temporarily handles a financial instrument, in order to comply with its obligation to act in accordance with Principle 10 (Clients' assets), the following are guides to good practice:

(1) a firm should keep the financial instrument secure, record it as belonging to that client, and forward it to the client or in accordance with the client's instructions as soon as practicable after receiving it; and
(2) a firm should make and retain a record of the fact that the firm has handled that financial instrument and of the details of the client concerned and of any action the firm has taken.

01/11/2007

Opt-in to the MiFID custody rules

CASS 6.1.17

(1) A firm that holds financial instruments to which this chapter applies and assets in respect of which the non-directive custody chapter applies, may elect to comply with the provisions of this chapter in respect of all assets so held and if it does so, this chapter applies as if all such assets were financial instruments that the firm receives and holds in the course of, or in connection with, its MiFID business.
(1A) A third country investment firm that holds designated investments belonging to a client in the course of its equivalent business may elect to comply with the provisions of this chapter in respect of the assets it holds to which the non-directive custody chapter applies. If it does so, this chapter applies as if all such assets were assets that the firm receives and holds in the course of, or in connection with, MiFID business.
(2) An election under this rule must be in respect of all the activities of the firm when it is safeguarding and administering investments belonging to a client with the exception of arranging safeguarding and administration of assets within the scope of CASS 2.1.21 R and CASS 2.1.22 R and depositary receipt business within the scope of CASS 2.1.24 R to CASS 2.1.26 R.
(3) A firm must make and retain a written record of the election it makes under this rule, including the date from which the election is to be effective. The firm must make the record on the date it makes the election and must keep it for a period of five years after ceasing to use it.

01/11/2007

CASS 6.1.18

A firm cannot rely upon this opt-in in respect of arranging safeguarding and administration of assets and depositary receipt business as the custody rules in the non-directive custody chapter provide specialised regimes in respect of these types of business which are outside the scope of this chapter.

01/11/2007

CASS 6.1.19

If a firm has opted to comply with this chapter, the non-directive custody chapter will have no application to the activities to which the election applies.

01/11/2007

CASS 6.1.20

A firm (other than a third country investment firm) that is only subject to the non-directive custody chapter may not choose to comply with this chapter.

01/11/2007

CASS 6.1.20A

The information requirements concerning the safeguarding of financial instruments belonging to a client (see COBS 6.1.7 R) apply to a firm that has elected to comply with this chapter with respect of all assets to which the election applies.

01/11/2007

Disposal of financial instruments

CASS 6.1.21

The custody rules cease to have effect in relation to a financial instrument it has been disposed of in accordance with a valid client instruction.

01/11/2007

General purpose

CASS 6.1.22

Principle 10 (Clients' assets) requires a firm to arrange adequate protection for clients' assets when it is responsible for them. As part of these protections, the custody rules require a firm to take appropriate steps to protect financial instruments for which it is responsible.

01/11/2007

CASS 6.1.23

The rules in this chapter are designed primarily to restrict the commingling of client and the firm's assets and minimise the risk of the client's financial instruments being used by the firm without the client's agreement or contrary to the client's wishes, or being treated as the firm's assets in the event of its insolvency.

01/11/2007

CASS 6.1.24

The custody rules also implement the provisions of MiFID which regulate the obligations of a firm when it holds financial instruments belonging to a client.

01/11/2007

CASS 6.2

Holding of client assets

01/11/2007

Requirement to protect clients' financial instruments

CASS 6.2.1

A firm must, when holding financial instruments belonging to clients, make adequate arrangements so as to safeguard clients' ownership rights, especially in the event of the firm's insolvency, and to prevent the use of financial instruments belonging to a client on the firm's own account except with the client's express consent.

[Note: article 13(7) of MiFID]

01/11/2007

Requirement to have adequate organisational arrangements

CASS 6.2.2

A firm must introduce adequate organisational arrangements to minimise the risk of the loss or diminution of clients' financial instruments, or the rights in connection with those financial instruments, as a result of the misuse of the financial instruments, fraud, poor administration, inadequate record-keeping or negligence.

[Note: article 16(1)(f) of the MiFID implementing Directive]

01/11/2007

CASS 6.2.3

To the extent practicable, a firm must effect appropriate registration or recording of legal title to a financial instrument in the name of:

(1) the client (or, where appropriate, the trustee firm), unless the client is an authorised person acting on behalf of its client, in which case it may be registered in the name of the client of that authorised person;
(2) a nominee company which is controlled by:

(a) the firm;
(b) an affiliated company;
(c) a recognised investment exchange or a designated investment exchange; or
(d) a third party with whom financial instruments are deposited under CASS 6.3;

(3) any other third party if:

(a) the financial instrument is subject to the law or market practice of a jurisdiction outside the United Kingdom and the firm has taken reasonable steps to determine that it is in the client's best interests to register or record it in that way, or that it is not feasible to do otherwise, because of the nature of the applicable law or market practice; and
(b) the firm has notified the client in writing;

(4) the firm if:

(a) the financial instrument is subject to the law or market practice of a jurisdiction outside the United Kingdom and the firm has taken reasonable steps to determine that it is in the client's best interests to register or record it in that way, or that it is not feasible to do otherwise, because of the nature of the applicable law or market practice; and
(b) the firm has notified the client if a professional client, or obtained prior written consent if a retail client.

01/11/2007

CASS 6.2.4

A firm must accept the same level of responsibility to its client for any nominee company controlled by the firm with respect of any requirements of the custody rules.

01/11/2007

CASS 6.2.5

A firm may register or record legal title to its own financial instrument in the same name as that in which legal title to a financial instrument is registered or recorded, but only if:

(1) the firm's financial instruments are separately identified in the firm's records from the financial instruments; or
(2) the firm registers or records a financial instrument in accordance with CASS 6.2.3R (4).

01/11/2007

CASS 6.2.6

A firm when complying with CASS 6.2.3R (3) or CASS 6.2.3R (4) will be expected to demonstrate that adequate investigations have been made of the market concerned by reference to local sources, which may include an appropriate legal opinion.

01/11/2007

CASS 6.2.7

A firm must ensure that any documents of title to financial instruments in bearer form, belonging to the firm and which it holds in its physical possession, are kept separately from any document of title to a client's financial instrument in bearer form.

01/11/2007

CASS 6.3

Depositing assets with third parties

01/11/2007

CASS 6.3.1

(1) A firm may deposit financial instruments held by it on behalf of its clients into an account or accounts opened with a third party, but only if it exercises all due skill, care and diligence in the selection, appointment and periodic review of the third party and of the arrangements for the holding and safekeeping of those financial instruments.
(2) A firm must take the necessary steps to ensure that any client's financial instruments deposited with a third party, in accordance with this rule are identifiable separately from the financial instruments belonging to the firm and from the financial instruments belonging to that third party, by means of differently titled accounts on the books of the third party or other equivalent measures that achieve the same level of protection.
(3) When a firm makes the selection, appointment and conducts the periodic review referred under this rule, it must take into account:

(a) the expertise and market reputation of the third party; and
(b) any legal requirements or market practices related to the holding of those financial instruments that could adversely affect clients' rights.

(4) A firm must make a record of the grounds upon which it satisfies itself as to the appropriateness of its selection of a third party as required in this rule. The firm must make the record on the date it makes the selection and must keep it from the date of such selection until five years after the firm ceases to use the third party to hold financial instruments belonging to clients.

[Note: articles 16(1)(d) and 17(1) of the MiFID implementing Directive]

01/11/2007

CASS 6.3.2

In discharging its obligations under this section, a firm should also consider, together with any other relevant matters:

(1) once a financial instrument has been lodged by the firm with the third party, the third party's performance of its services to the firm;
(2) the arrangements that the third party has in place for holding and safeguarding the financial instrument;
(3) current industry standard reports, for example Financial Reporting and Auditing Group (FRAG) 21 report or its equivalent;
(4) the capital or financial resources of the third party;
(5) the credit rating of the third party; and and
(6) any other activities undertaken by the third party and, if relevant, any affiliated company.

01/11/2007

CASS 6.3.3

A firm should consider carefully the terms of its agreements with third parties with which it will deposit financial instruments belonging to a client. The following terms are examples of the issues firms should address in this agreement:

(1) that the title of the account indicates that any financial instrument credited to it does not belong to the firm;
(2) that the third party will hold or record a financial instrument belonging to the firm's client separately from any financial instrument belonging to the firm or to the third party;
(3) the arrangements for registration or recording of the financial instrument if this will not be registered in the client's name;
(4) the restrictions over the third party's right to claim a lien, right of retention or sale over any financial instrument standing to the credit of the account;
(5) the restrictions over the circumstances in which the third party may withdraw assets from the account;
(6) the procedures and authorities for the passing of instructions to or by the firm;
(7) the procedures regarding the claiming and receiving of dividends, interest payments and other entitlements accruing to the client; and
(8) the provisions detailing the extent of the third party's liability in the event of the loss of a financial instrument caused by the fraud, wilful default or negligence of the third party or an agent appointed by him.

01/11/2007

CASS 6.3.4

(1) A firm must only deposit financial instruments with a third party in a jurisdiction which specifically regulates and supervises the safekeeping of financial instruments for the account of another person with a third party who is subject to such regulation.
(2) A firm must not deposit financial instruments held on behalf of a client with a third party in a country that is not an EEA State (third country) and which does not regulate the holding and safekeeping of financial instruments for the account of another person unless:

(a) the nature of the financial instruments or of the investment services connected with those financial instruments requires them to be deposited with a third party in that third country; or
(b) the financial instruments are held on behalf of a professional client and the client requests the firm in writing to deposit them with a third party in that third country.

(3) In the case of activities a firm has opted into this chapter under CASS 6.1.17R (1) and (2) do not apply. However, the firm must deposit financial instruments belonging to clients pursuant to such activities with a custodian and must hold any document of title to a financial instrument either in the physical possession of the firm or:

(a) for a retail client, with a custodian;
(b) for a professional client, with one or more of the following:

(i) a custodian;
(ii) any person whom the firm has taken reasonable steps to determine is a person whose business includes the provision of appropriate safe custody services; or
(iii) in accordance with the professional client's specific written instructions.

[Note: article 17(2) and (3) of the MiFID implementing Directive]

01/11/2007

CASS 6.4

Use of financial instruments

01/11/2007

CASS 6.4.1

(1) A firm must not enter into arrangements for securities financing transactions in respect of financial instruments held by it on behalf of a client or otherwise use such financial instruments for its own account or the account of another client of the firm, unless:

(a) the client has given express prior consent to the use of the financial instruments on specified terms; and
(b) the use of that client's financial instruments is restricted to the specified terms to which the client consents.

(2) A firm must not enter into arrangements for securities financing transactions in respect of financial instruments held by it on behalf of a client in an omnibus account held by a third party, or otherwise use financial instruments held in such an account for its own account or for the account of another client unless, in addition to the conditions set out in (1):

(a) each client whose financial instruments are held together in an omnibus account has given express prior consent in accordance with (1)(a); or
(b) the firm has in place systems and controls which ensure that only financial instruments belonging to clients who have given express prior consent in accordance with the requirements of (1)(a) are used.

(3) For the purposes of obtaining the express prior consent of a retail client under this rule the signature of the retail client or an equivalent alternative mechanism is required.

[Note: article 19 of the MiFID implementing Directive]

01/11/2007

CASS 6.4.2

Firms are reminded of the client's best interests rule, which requires the firm to act honestly, fairly and professionally in accordance with the best interests of their clients. An example of what is generally considered to be such conduct, in the context of stock lending activities involving retail clients is that:

(1) the firm ensures that relevant collateral is provided by the borrower in favour of the client;
(2) the current realisable value of the financial instrument and of the relevant collateral is monitored daily; and
(3) the firm provides relevant collateral to make up the difference where the current realisable value of the collateral falls below that of the financial instrument, unless otherwise agreed in writing by the client.

01/11/2007

CASS 6.4.3

Where a firm uses financial instruments as permitted in this section, the records of the firm must include details of the client on whose instructions the use of the financial instruments has been effected, as well as the number of financial instruments used belonging to each client who has given consent, so as to enable the correct allocation of any loss.

[Note: article 19(2) of the MiFID implementing Directive]

01/11/2007

CASS 6.5

Records, accounts and reconciliations

01/11/2007

Records and accounts

CASS 6.5.1

A firm must keep such records and accounts as necessary to enable it at any time and without delay to distinguish financial instruments held for one client from financial instruments held for any other client, and from the firm's own financial instruments.

[Note: article 16(1)(a) of the MiFID implementing Directive]

01/11/2007

CASS 6.5.2

A firm must maintain its records and accounts in a way that ensures their accuracy, and in particular their correspondence to the financial instruments held for clients.

[Note: article 16(1)(b) of the MiFID implementing Directive]

01/11/2007

Record keeping

CASS 6.5.3

A firm must ensure that the records made under this section are retained for a period of five years after they are made.

01/11/2007

Internal reconciliation of financial instruments held for clients

CASS 6.5.4

(1) SYSC 4.1.1 R requires firms to have robust governance arrangements, such as internal control mechanisms, including sound administrative and accounting procedures and effective control and safeguard arrangements for information processing systems. In addition, SYSC 6.1.1 R requires firms to establish, implement and maintain adequate policies and procedures sufficient to ensure the firm's compliance with its obligations under the regulatory system. Carrying out internal reconciliations of the financial instruments held for each client with the financial instruments held by the firm and third parties is an important step in the discharge of the firm's obligations under CASS 6.5.2 R, SYSC 4.1.1 R and SYSC 6.1.1 R.
(2) A firm should perform such internal reconciliations:

(a) as often as is necessary; and
(b) as soon as reasonably practicable after the date to which the reconciliation relates;

to ensure the accuracy of the firm's records and accounts.
(3) Reconciliation methods which can be adopted for these purposes include the 'total count method', which requires that all financial instruments be counted and reconciled as at the same date.
(4) If a firm chooses to use an alternative reconciliation method (for example the 'rolling stock method') it needs to ensure that:

(a) all of a particular financial instrument are counted and reconciled as at the same date; and
(b) all financial instruments are counted and reconciled during a period of six months.

01/11/2007

CASS 6.5.5

A firm that uses an alternative reconciliation method must first send a written confirmation to the FSA from the firm's auditor that the firm has in place systems and controls which are adequate to enable it to use the method effectively.

01/11/2007

Reconciliations with external records

CASS 6.5.6

A firm must conduct on a regular basis, reconciliations between its internal accounts and records and those of any third parties by whom those financial instruments are held.

[Note: article 16(1)(c) of the MiFID implementing Directive]

01/11/2007

CASS 6.5.7

Where a firm deposits financial instruments belonging to a client with a third party, in complying with the requirements of CASS 6.5.6 R, the firm should seek to ensure that the third party will deliver to the firm a statement as at a date or dates specified by the firm which details the description and amounts of all the financial instruments credited to the account, and that this statement is delivered in adequate time to allow the firm to carry out the periodic reconciliations required in CASS 6.5.6 R.

01/11/2007

Frequency of external reconciliations

CASS 6.5.8

A firm should perform the reconciliation required by CASS 6.5.6 R:

(1) as regularly as is necessary; and
(2) as soon as reasonably practicable after the date to which the reconciliation relates;

to ensure the accuracy of its internal accounts and records against those of third parties by whom financial instruments are held.

01/11/2007

Independence of person conducting reconciliations

CASS 6.5.9

Whenever possible, a firm should ensure that reconciliations are carried out by a person (for example an employee of the firm) who is independent of the production or maintenance of the records to be reconciled (see SYSC 5.1.6 R).

01/11/2007

Reconciliation discrepancies

CASS 6.5.10

A firm must promptly correct any discrepancies which are revealed in the reconciliations envisaged by this section, and make good, or provide the equivalent of, any unreconciled shortfall for which there are reasonable grounds for concluding that the firm is responsible.

01/11/2007

CASS 6.5.11

Items recorded or held within a suspense or error account fall within the scope of discrepancies.

01/11/2007

CASS 6.5.12

A firm may, where justified, conclude that another person is responsible for an irreconcilable shortfall despite the existence of a dispute with that other person about the unreconciled item. In those circumstances, the firm is not required to make good the shortfall but is expected to take reasonable steps to resolve the position with the other person.

01/11/2007

Notification requirements

CASS 6.5.13

A firm must inform the FSA in writing without delay:

(1) if it has not complied with, or is unable, in any material respect, to comply with the requirements in CASS 6.5.1 R, CASS 6.5.2 R or CASS 6.5.6 R; or
(2) if, having carried out a reconciliation, it has not complied with, or is unable, in any material respect, to comply with CASS 6.5.10 R.

01/11/2007

Audit of compliance with the MiFID custody rules

CASS 6.5.14

Firms are reminded that the auditor of the firm has to confirm in the report submitted to the FSA under SUP 3.10 (Duties of auditors: notification and report on client assets) that the firm has maintained systems adequate to enable it to comply with the rules in this chapter.

01/11/2007

CASS 6.5.15

Firms that use an alternative reconciliation method are reminded that the firm's auditor must confirm to the FSA in writing that the firm has in place systems and controls which are adequate to enable it to use another method effectively (see CASS 6.5.5 R).

01/11/2007