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Status: You are viewing the version of the handbook as on 2005-06-30.

CASS 2.2 Segregation, registration and recording, and holding1

Application1

CASS 2.2.1R

CASS 2.2 applies in accordance with CASS 2.11

CASS 2.2.2G

The rules governing the segregation, registration or recording, and holding of a client's safe custody investments require a clear distinction to be maintained, to the extent practicable, between safe custody investment held for the clients and those designated investments held for the firm.

General

CASS 2.2.3R

A firm must segregate safe custody investments from its own designated investments except to the extent required by law or permitted by the custody rules.

CASS 2.2.4G

A firm which is a trustee is bound in relation to safe custody investments by the terms of its trust and applicable law and CASS 2.2.3 R does not modify those obligations.

CASS 2.2.5R

A firm must ensure that if a safe custody investment is recorded in an account with itself, the title of that account makes it clear that the safe custody investment belongs to a client, and is segregated from the firm's designated investments.

CASS 2.2.6G

CASS 2.2.5 R refers to the firm's own records.

CASS 2.2.7R

A firm must require that if a safe custody investment is recorded in an account with a custodian, the custodian makes it clear in the title of the account that the safe custody investment belongs to one or more clients of the firm.

Affiliated companies

CASS 2.2.8R

If a firm holds a designated investment on behalf of an affiliated company, it must not hold that designated investment in the same account as a safe custody investment (of a client who is not an affiliated company) unless CASS 2.1.9 R(1) (Application) applies, and consequently, the firm is applying the custody rules to that investment.

Registration and recording: purpose

CASS 2.2.9G

The registration and recording rules are designed to safeguard and secure a client's entitlement. The rules are not in order of priority and firms are expected to register and record the legal title of a safe custody investment in such a manner as to provide the client with appropriate protection.

CASS 2.2.10R

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

  1. (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. (2)

    a nominee company which is controlled by:

    1. (a)

      the firm;

    2. (b)

      an affiliated company;

    3. (c)

      a recognised investment exchange or designated investment exchange;

    4. (d)

      a custodian;

  3. (3)

    a custodian if:

    1. (a)

      the safe custody investment 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

    2. (b)

      the firm has notified the client in writing;

  4. (4)

    the firm if:

    1. (a)

      the safe custody investment 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

    2. (b)

      the firm has notified the client in accordance with CASS 2.3.10 R (Risk disclosures) if a market counterparty or an intermediate customer, or obtained his prior written consent if a private customer; or

  5. (5)

    any other person, in accordance with the client's specific written instruction, provided:

    1. (a)

      the firm complies with CASS 2.3.11 R (Risk disclosures); and

    2. (b)

      in the case of a private customer, the other person is not an associate of the firm.

CASS 2.2.11G

If the client in CASS 2.2.10 R(1) is an authorised person and the safe custody investments belong to clients of that authorised person, it is the responsibility of that authorised person to ensure that the registering or recording is appropriate for the client concerned.

CASS 2.2.12G

A firm that applies CASS 2.2.10 R (3) or (4) will be expected to demonstrate that adequate investigations have been made of the market concerned by reference to local sources which may include appropriate legal opinion.

CASS 2.2.13R

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

  1. (1)

    the firm's designated investments are separately identified in the firm's records from safe custody investment; or

  2. (2)

    the firm registers or records a safe custody investment in accordance with CASS 2.2.10 R(4).

Holding: purpose

CASS 2.2.14G

The following rules are designed to provide an appropriate level of protection for a safe custody investment which the firm physically holds. A firm should ensure that the arrangements for holding any document of title to a safe custody investment are appropriate to the value and risk of loss of the safe custody investment concerned, and that there are adequate controls designed to safeguard it from damage, misappropriation or other loss.

CASS 2.2.15R

A firm must hold any document of title to a safe custody investment either in the physical possession of the firm or:

  1. (1)

    for a private customer, with a custodian in an account designated for clients' safe custody investments;

  2. (2)

    for a market counterparty or intermediate customer, with one or more of the following:

    1. (a)

      a custodian in an account designated for clients' safe custody investment;

    2. (b)

      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

    3. (c)

      subject to CASS 2.3.11 R (Risk disclosures) in accordance with the market counterparty's or intermediate customer's specific written instructions.

CASS 2.2.16G

In CASS 2.2.15 R reasonable steps may include on the basis of an appropriate legal opinion obtained by the firm or another person.

CASS 2.2.17R

A firm must ensure that any documents of title to designated investments 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 safe custody investment in bearer form.

Assessment of a custodian

CASS 2.2.18R

Before a firm holds a safe custody investment with a custodian or arranges registration of a safe custody investment through a custodian, it must undertake an appropriate risk assessment of that custodian.

CASS 2.2.19R

Before a firm recommends a custodian to a private customer, it must undertake an appropriate risk assessment of that custodian.

CASS 2.2.20G

A firm that holds safe custody investments with a custodian or recommends custodians to private customers, is expected to establish and maintain a system for assessing the appropriateness of its selection of the custodian and to assess the continued appointment of that custodian periodically as often as is reasonable in the relevant market. In order to comply with SYSC 3.2.20 R (Records), the firm is also expected to make and retain a record of the grounds on which it satisfies itself as to the appropriateness of its selection or, following a periodic assessment, continued appropriateness of the custodian.

CASS 2.2.21G

In undertaking an appropriate risk assessment of the custodian in accordance with CASS 2.2.18 R and CASS 2.2.19 R, firms might take into account any or all of the following matters:

  1. (1)

    the expertise and market reputation of the custodian, and, once a safe custody investment has been lodged by the firm with the custodian, the custodian's performance of its services to the firm;

  2. (2)

    the arrangements for holding and safeguarding an investment;

  3. (3)

    an appropriate legal opinion as to the protection of custody assets in the event of the insolvency of the custodian;

  4. (4)

    current industry standard reports, for example Financial reporting and auditing group (FRAG) 21 report or its equivalent;

  5. (5)

    whether the custodian is regulated and by whom;

  6. (6)

    the capital or financial resources of the custodian;

  7. (7)

    the credit rating of the custodian;

  8. (8)

    any other activities undertaken by the custodian and, if relevant, any affiliated company.

CASS 2.2.22G

In undertaking the risk assessment of a custodian, a firm should have regard to all relevant circumstances including legal requirements and custodial practices, in the relevant jurisdiction. For example, if the legal requirements of a jurisdiction in which the firm proposes to hold a safe custody investment with a custodian, makes it mandatory to use a particular custodian for that purpose, then the FSA will regard this fact alone as justifying the use of that custodian. If the use of that custodian is a matter of custodial practice in that jurisdiction, the custodian is likely to be appropriate for that purpose subject to the firm checking whether following that practice is appropriate for the client's purposes. In both circumstances, the firm will still be under a duty to ensure the continued appropriateness of the custodian, taking account of the current legal requirements and custodial practice of that jurisdiction.

CASS 2.2.23R

Before a firm holds a custody asset with a custodian which is in the same group as the firm, it must inform the client in writing that it intends to do so.