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CASS 4.3 Segregation and operation of client money accounts1

Application1

CASS 4.3.1R

CASS 4.3 applies in accordance with CASS 4.11

CASS 4.3.2G

The purpose of the client money rules is to ensure that, unless otherwise permitted, client money is kept separate from the firm's own money. Segregation, in the event of a firm'sfailure, is important for the effective operation of the statutory trust that is created to protect client money. The aim is to clarify the difference between client money and general creditors' entitlements in the event of the failure of the firm.

CASS 4.3.3R

A firm must, except to the extent permitted by the client money rules, hold client money separate from the firm'smoney.

CASS 4.3.4R

A firm may segregate client money in a different currency from that of receipt. If it does so, the firm must ensure that the amount held is adjusted each day to an amount at least equal to the original currency amount (or the currency in which the firm has its liability to its clients, if different), translated at the previous day's closing spot exchange rate.

CASS 4.3.5R

A firm must not hold money other than client money in a client bank account unless it is:

  1. (1)

    a minimum sum required to open the account, or to keep it open; or

  2. (2)

    money temporarily in the account in accordance with CASS 4.3.13 R (Mixed remittance); or

  3. (3)

    interest credited to the account which exceeds the amount due to clients as interest and has not yet been withdrawn by the firm.

CASS 4.3.6R

If it is prudent to do so to ensure that client money is protected, a firm may pay into a client bank accountmoney of its own, and that money will then become client money for the purposes of the client money rules and the client money distribution rules.

CASS 4.3.7G

Firms are reminded of the requirements of CASS 4.3.66 R and CASS 4.3.67 R. The money paid into the client bank account by the firm, in accordance with CASS 4.3.6 R, does not lessen the requirement to carry out the daily client money calculation.

Payment of client money into a client bank account

CASS 4.3.8R

A firm must segregate client money it receives using either:

  1. (1)

    the approach detailed in CASS 4.3.10 R (the 'normal approach'); or

  2. (2)

    the approach detailed in CASS 4.3.12 R (the 'alternative approach'), subject to:

    1. (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 operate the alternative approach effectively; and

    2. (b)

      the firm appointing a manager responsible for compliance with the client money rules.

CASS 4.3.9G

The alternative approach is designed for a firm that operates in a multi-product, multi-currency environment for which adopting the normal approach would be unduly burdensome and would not achieve the client protection objective. Under the alternative approach, client money is received into and paid out of a firm's own bank accounts; consequently systems and controls that are capable of monitoring the client money flows are required, so that the firm can perform the daily client money calculation accurately. A firm that adopts the alternative approach will segregate client money into a client bank account on a daily basis, after having performed the client money calculation to determine what the client money requirement was at the close of the previous business day.

CASS 4.3.10R

If a firm receives and segregates client money, unless it adopts the alternative approach, it must, subject to CASS 4.1.15 R and CASS 4.1.16 R, CASS 4.3.11 R, CASS 4.3.13 R, CASS 4.3.15 R and CASS 4.3.21 R (delivery versus payment) either:

  1. (1)

    pay it as soon as possible, and in any event no later than the next business day after receipt, into a client bank account; or

  2. (2)

    pay it out in accordance with CASS 4.3.99 R.

CASS 4.3.11R

If client money is received by the firm in the form of an automated transfer, the firm must take reasonable steps to ensure that:

  1. (1)

    the money is received directly into a client bank account; and

  2. (2)

    if money is received directly into the firm's own account, the money is transferred into a client bank account no later than the next business day after receipt.

CASS 4.3.12R

Under the alternative approach, a firm receiving and segregating client money:

  1. (1)

    is required to pay any money to or on behalf of clients out of its own account;

  2. (2)

    is required to perform the segregation calculation contained in CASS 4.3.67 R, adjust the balance held in its client bank accounts and then segregate the money in the client bank account until the calculation is re-performed on the next business day;

  3. (3)

    is not required to pay client money into a client bank account in accordance with any of CASS 4.3.10 R(1), CASS 4.3.11 R, CASS 4.3.13 R, CASS 4.3.15 R(1) and (2), CASS 4.3.21 R(1) and (2)(b) and CASS 4.3.24 R(1);

  4. (4)

    may receive all client money into its own bank account;

  5. (5)

    may choose to operate the alternative approach for some types of business (for example overseas equities transactions) and operate the normal approach for other types of business (for example contingent liability investments) if the firm can demonstrate that its systems and controls are adequate; and

  6. (6)

    may use an historic average to account for uncleared cheques in accordance with CASS 4.3.69 G.

Mixed remittance

CASS 4.3.13R

If a firm receives a mixed remittance (that is part client money and part other money), it must:

  1. (1)

    pay the full sum into a client bank account in accordance with CASS 4.3.10 R(1); and

  2. (2)

    pay the money that is not client money out of the client bank account within one business day of the day on which the firm would normally expect the remittance to be cleared.

CASS 4.3.14G

When money is due to the firm in respect of fees and commissions, the firm should follow the provisions in CASS 4.1.20 E.

Appointed representatives, field representatives and other agents

CASS 4.3.15R

A firm must establish and maintain procedures to ensure that client money received by its appointed representatives, field representatives or other agents is:

  1. (1)

    paid into a client bank account of the firm in accordance with CASS 4.3.10 R(1); or

  2. (2)

    forwarded to the firm, or in the case of a field representative forwarded to a specified business address of the firm, so as to ensure that the money arrives at the specified business address by the close of the third business day.

CASS 4.3.16G

For the purposes of CASS 4.3.15 R(2), the client money received on business day one should be forwarded to the firm or specified business address of the firm no later than the next business day after receipt (business day two) in order for it to reach that firm or specified business address by the close of the third business day. Procedures requiring the client money to be sent to the firm or the specified business address of the firm by first class post no later than the next business day after receipt would meet the requirements of CASS 4.3.15 R(2).

CASS 4.3.17R

If client money is received in accordance with CASS 4.3.15 R, the firm must ensure that its appointed representative, field representative or other agent keeps client money separately identifiable from any other money (including that of the firm) until the client money is paid into a client bank account or sent to the firm.

CASS 4.3.18G

For the purposes of CASS 4.3.15 R and CASS 4.3.17 R, a firm that operates a number of small branches, but handles or accounts for all client money centrally, may treat those small branches as appointed representatives.

Client entitlements

CASS 4.3.19R

A firm must take reasonable steps to ensure that it is notified promptly of any receipt of client money in the form of client entitlements.

CASS 4.3.20G

The firm should receive regular statements from overseas depositaries used by the firm. The frequency of such statements will depend on the volume of business. Client entitlements are such things as dividends, coupons and other distributions with similar characteristics.

CASS 4.3.21R

When a firm receives a client entitlement on behalf of a client, it must pay any part of it which is client money:

  1. (1)

    for client entitlements received in the United Kingdom, into a client bank account in accordance with CASS 4.3.10 R(1); or

  2. (2)

    for client entitlements received outside the United Kingdom, into any bank account operated by the firm, provided that such client money is:

    1. (a)

      paid to, or in accordance with, the instructions of the client concerned; or

    2. (b)

      paid into a client bank account in accordance with CASS 4.3.10 R(1), as soon as possible but no later than five business days after the firm is notified of its receipt.

CASS 4.3.22R

A firm must take reasonable steps to ensure that a client entitlement, which is client money, is allocated within a reasonable period of time after notification of receipt.

CASS 4.3.23E
  1. (1)

    A firm should allocate client entitlements due to the individual clients within a period of ten business days.

  2. (2)

    Compliance with (1) may be relied on as tending to establish compliance with CASS 4.3.22 R.

  3. (3)

    Contravention of (1) may be relied on as tending to establish contravention of CASS 4.3.22 R.

Money due to a client from a firm

CASS 4.3.24R

If a firm is liable to pay money to a client, it must as soon as possible, and no later than one business day after the money is due and payable:

  1. (1)

    pay it into a client bank account, in accordance with CASS 4.3.10 R(1); or

  2. (2)

    pay it to, or to the order of, the client.

CASS 4.3.25G

Money may become due to a client in respect of an agreement entered into with, or for, that client, in the course of the firm's business.

Interest

CASS 4.3.26R

Unless a firm notifies a retail client4 in writing whether or not interest is to be paid on client money and, if so, on what terms and at what frequency, it must pay that retail client4 all interest earned on that client money. Any interest due to a client will be client money.

44
CASS 4.3.27G

If no interest is payable to a retail client,4 that fact should be separately identified in an agreement or notification.

4
CASS 4.3.28G

If a firm outlines its policy on its payment of interest under CASS 4.3.26 R, it need not necessarily disclose the actual rates prevailing at any particular time; the firm should disclose the terms, for example, LIBOR plus or minus 'x' percent.

Transfer of client money to a third party

CASS 4.3.29G

CASS 4.3.30 R sets out the requirements a firm must comply with when it transfers client money to another person without discharging its fiduciary duty owed to that client. Such circumstances arise when, for example, a firm passes client money to an intermediate broker for contingent liability investments in the form of initial or variation margin on behalf of a client. In these circumstances, the firm remains responsible for that client's equity balance4 held at the intermediate broker until the contract is terminated and all of that client's positions at that broker closed. If a firm wishes to discharge itself from its fiduciary duty, it should do so in accordance with CASS 4.3.99 R.

4
CASS 4.3.30R

A firm may allow another person, such as an exchange, a clearing house or an intermediate broker, to hold or control client money, but only if:

  1. (1)

    the firm transfers the client money:

    1. (a)

      for the purpose of a transaction for a client through or with that person; or

    2. (b)

      to meet a client's obligation to provide collateral for a transaction (for example, an initial margin requirement for a contingent liability investment); and

  2. (2)

    in the case of a retail client,4 that customer has been notified that the client money may be transferred to the other person.

    4
CASS 4.3.31G

In relation to the notification required by CASS 4.3.30 R(2), there is no need for a firm to make a separate disclosure in relation to each transfer made.

CASS 4.3.32G

A firm should not hold excess client money in its client transaction accounts with intermediate brokers, settlement agents and OTC counterparties; it should be held in a client bank account.

Client bank accounts

CASS 4.3.33G

The FSA generally requires a firm to place client money in a client bank account with an approved bank.

CASS 4.3.34R
  1. (1)

    A firm must ensure that, subject to CASS 4.3.30 R and CASS 4.3.40 R, client money is held in a client bank account at one or more approved banks.

  2. (2)

    If the firm is a trustee firm, it must:

    1. (a)

      hold client money in a client bank account with an approved bank at all times; and

    2. (b)

      maintain separate client bank accounts for each trust.

CASS 4.3.35R

A firm may open one or more client bank accounts in the form of a designated client bank account. Characteristics of these accounts are that:

  1. (1)

    the account holds money of one or more clients;

  2. (2)

    the account includes in its title the word 'designated';

  3. (3)

    the clients whose money is in the account have each consented in writing to the use of the bank with which the client money is to be held; and

  4. (4)

    in the event of the failure of that bank, the account is not pooled with any other type of account unless a primary pooling event occurs.

CASS 4.3.36R

A firm may open one or more client bank accounts in the form of a designated client fund account. Characteristics of these accounts are that:

  1. (1)

    the account holds at least part of the client money of one or more clients, each of whom has consented to that money being held in the same client bank accounts at the same banks (the client money of such clients constituting a designated fund);

  2. (2)

    the account includes in its title the words 'designated fund'; and

  3. (3)

    in the event of the failure of a bank with which part of a designated fund is held, each designated client fund account held with the failed bank will form a pool with any other designated client fund account containing part of that same designated fund unless a primary pooling event occurs.

CASS 4.3.37G

The client money distribution rules set out the provisions of a primary pooling event on the failure of a firm.

CASS 4.3.38G

The effect of CASS 4.3.36 R is that a designated client fund account may be used for a client only where that client has consented to the use of that account and all other designated client fund accounts which may be pooled with it. A client who consents to the use of bank A and bank B should have his money held in a different designated client fund account at bank B from a client who has consented to the use of banks B and C.

CASS 4.3.39G

A firm may operate as many client bank accounts as it wishes. When, for example, a firm has previously operated a dividend claims bank account and a margined transaction bank account under the Financial Services (Client Money) Regulations 1991 and Financial Services (Client Money) (Supplementary) Regulations 1991, these will be client bank accounts for the purposes of the client money rules.

CASS 4.3.40R

A firm (other than a trustee firm) may hold client money with a bank that is not an approved bank if all of the following conditions are met:

  1. (1)

    the client money relates to:

    1. (a)

      the settlement of a transaction, or a series of transactions; or

    2. (b)

      the distribution of income;

    subject to the law or market practice of a jurisdiction outside the United Kingdom;

  2. (2)

    because of the applicable law or market practice of that overseas jurisdiction, it is not possible to hold the client money in a client bank account with an approved bank;

  3. (3)

    the firm holds the money with such a bank for no longer than is necessary to effect the transaction, or series of transactions;

  4. (4)

    the firm notifies each relevant eligible counterparty and professional client4 and obtains the prior written consent of each relevant retail client4 that:

    44
    1. (a)

      the client money will not be held with an approved bank;

    2. (b)

      in such circumstances, the legal and regulatory regime applying to the bank with which the client money is held will be different from that of the United Kingdom and, in the event of a failure of the bank, the client money may be treated differently from the treatment which would apply if the client money were held by an approved bank in the United Kingdom; and

    3. (c)

      if it is the case, the particular bank has not accepted that it has no right of set off or counterclaim against client money held, in respect of any sum owed by the firm on any other account held at that bank, as required by CASS 4.3.48 R; and

  5. (5)

    the client money is held in a designated bank account.

A firm's selection of a bank

CASS 4.3.41G

A firm owes a duty of care to a client when it decides where to place client money. The review required by CASS 4.3.42 R is intended to ensure that the risks inherent in placing client money with the banks are minimised or appropriately diversified by requiring a firm to consider carefully the bank or banks with which it chooses to place client money.

CASS 4.3.42R

Before a firm opens a client bank account and as often as is appropriate on a continuing basis (no less than once in each financial year), it must take reasonable steps to establish that the bank is appropriate for that purpose.

CASS 4.3.43G

A firm should consider diversifying placements of client money with more than one bank where the amounts are, for example, of sufficient size to warrant such diversification.

CASS 4.3.44G

When considering where to place client money and to determine the frequency of the appropriateness test under CASS 4.3.42 R, a firm should consider taking into account, together with any other relevant matters:

  1. (1)

    the capital of the bank;

  2. (2)

    the amount of client money placed, as a proportion of the bank's capital and deposits;

  3. (3)

    the credit rating of the bank (if available); and

  4. (4)

    to the extent that the information is available, the level of risk in the investment and loan activities undertaken by the bank and its affiliated companies.

CASS 4.3.45G

A firm will be expected to perform due diligence when opening a client bank account with a bank that is authorised by an EEA regulator. Any continuing assessment of that bank may be restricted to verification that it remains authorised by an EEA regulator.

Group banks

CASS 4.3.46R

Subject to CASS 4.3.40 R, a firm that holds or intends to hold client money with a bank which is in the same group as the firm must:

  1. (1)

    undertake a continuous review in relation to that bank which is at least as rigorous as the review of any bank which is not in the same group, in order to ensure that the decision to use a group bank is appropriate for the client or trust;

  2. (2)

    disclose in writing to its client at the outset of the client relationship or, if later, not less than 20 business days before it begins to hold client money of that client with that bank:

    1. (a)

      that it is holding or intends to hold client money with a bank in the same group; and

    2. (b)

      the identity of the bank concerned.

CASS 4.3.47R

If a client has notified a firm in writing that he does not wish his money to be held with a bank in the same group as the firm, the firm must either:

  1. (1)

    place that client money in a client bank account with another bank in accordance with CASS 4.3.34 R; or

  2. (2)

    return that client money to, or pay it to the order of, the client.

Notification and acknowledgement of trust (banks)

CASS 4.3.48R

When a firm opens a client bank account, the firm must give or have given written notice to the bank requesting the bank to acknowledge to it in writing:

  1. (1)

    that all money standing to the credit of the account is held by the firm as trustee (or if relevant, as agent) and that the bank is not entitled to combine the account with any other account or to exercise any right of set-off or counterclaim against money in that account in respect of any sum owed to it on any other account of the firm; and

  2. (2)

    that the title of the account sufficiently distinguishes that account from any account containing money that belongs to the firm, and is in the form requested by the firm.

CASS 4.3.49R

In the case of a client bank account in the United Kingdom, if the bank does not provide the acknowledgement referred to in CASS 4.3.48 R within 20 business days after the firm dispatched the notice, the firm must withdraw all money standing to the credit of the account and deposit it in a client bank account with another bank as soon as possible.

CASS 4.3.50R

In the case of a client bank account outside the United Kingdom, if the bank does not provide the acknowledgement referred to in CASS 4.3.48 R within 20 business days after the firm dispatched the notice, the firm must notify the client of this fact as set out in CASS 4.3.56 R(3).

CASS 4.3.51G

Firms are reminded of the provisions of CASS 4.3.40 R(4), that sets out the notification and consents required when using a bank that is not an approved bank.

Notification and acknowledgement of trust (exchange, clearing house, intermediate broker or OTC counterparty)

CASS 4.3.52R

A firm which undertakes any contingent liability investment for clients through an exchange, clearing house, intermediate broker or OTC counterparty must, before the client transaction account is opened with the exchange, clearing house, intermediate broker or OTC counterparty:

  1. (1)

    notify the person with whom the account is to be opened that the firm is under an obligation to keep client money separate from the firm's own money, placing client money in a client bank account;

  2. (2)

    instruct the person with whom the account is to be opened that any money paid to it in respect of that transaction is to be credited to the firm'sclient transaction account; and

  3. (3)

    require the person with whom the account is to be opened to acknowledge in writing that the firm'sclient transaction account is not to be combined with any other account, nor is any right of set-off to be exercised by that person against money credited to the client transaction account in respect of any sum owed to that person on any other account.

CASS 4.3.53R

If the intermediate broker or OTC counterparty does not provide the acknowledgement required by CASS 4.3.52 R(3) within 20 business days of the dispatch of the notice and instruction, the firm must cease using the client transaction account with that broker or counterparty and arrange as soon as possible for the transfer or liquidation of any open positions and the repayment of any money.

CASS 4.3.54G

If a firm knows or reasonably ought to know that an intermediate broker or OTC counterparty will not provide the acknowledgement required by CASS 4.3.52 R, the firm should not open a client transaction account with that intermediate broker or OTC counterparty.

CASS 4.3.55R

If the exchange or clearing house does not provide the acknowledgement required by CASS 4.3.52 R(3) within 20 business days of the despatch of the notice and instruction, the firm must notify the client that a particular exchange or clearing house has not accepted that it has no right of set-off or counterclaim against money held in a client transaction account in respect of any sum owed on any other account of the firm, in that particular case or generally in an agreement entered into between the firm and its client.

Notification to clients: use of an approved bank outside the United Kingdom

CASS 4.3.56R

A firm must not hold client money in a client bank account outside the United Kingdom, unless the firm has previously disclosed to the client in writing:

  1. (1)

    that his money may be deposited in a client bank account outside the United Kingdom;

  2. (2)

    that in such circumstances, the legal and regulatory regime applying to the approved bank will be different from that of the United Kingdom and, in the event of a failure of the bank, his money may be treated in a different manner from that which would apply if the client money was held by a bank in the United Kingdom; and

  3. (3)

    if it is the case, that a particular bank has not accepted that it has no right of set-off or counterclaim against money held in a client bank account in respect of any sum owed on any other account of the firm, notwithstanding the firm's request to the bank as required by CASS 4.3.48 R.

CASS 4.3.57G

There is no need for a firm to make a separate disclosure under CASS 4.3.56 R(1) and (2) in relation to each jurisdiction.

CASS 4.3.58G

Firms are reminded of the provisions of CASS 4.3.40 R(4), that sets out the notification and consents required when using a bank that is an not approved bank.

CASS 4.3.59R

If a client has notified a firm in writing before entering into a transaction that client money is not to be held in a particular jurisdiction, the firm must either:

  1. (1)

    hold the client money in a client bank account in a jurisdiction to which the client has not objected; or

  2. (2)

    return the client money to, or to the order of, the client.

CASS 4.3.60G

Firms are reminded of the provisions of CASS 4.3.40 R(4), that sets out the notification and consents required when using a bank that is not an approved bank.

Notification to clients: use of an intermediate broker, settlement agent or OTC counterparty outside the United Kingdom.

CASS 4.3.61R

A firm must not undertake any transaction for a client that involves client money being passed to an intermediate broker, settlement agent or OTC counterparty located in a jurisdiction outside the United Kingdom, unless the firm has previously disclosed in writing to the client:

  1. (1)

    that his client money may be passed to a person outside the United Kingdom; and

  2. (2)

    that, in such circumstances, the legal and regulatory regime applying to the intermediate broker, settlement agent or OTC counterparty will be different from that of the United Kingdom and, in the event of a failure of the intermediate broker, settlement agent or OTC counterparty, this money may be treated in a different manner from that which would apply if the money was held by an intermediate broker, settlement agent or OTC counterparty in the United Kingdom.

CASS 4.3.62G

There is no need for a firm to make a separate disclosure under CASS 4.3.61 R in relation to each jurisdiction.

CASS 4.3.63R

If a client has notified a firm before entering into a transaction that he does not wish his money to be passed to an intermediate broker, settlement agent or OTC counterparty located in a particular jurisdiction, the firm must either:

  1. (1)

    hold the client money in a client bank account in the United Kingdom or a jurisdiction to which the client has not objected and pay its own money to the firm's own account with the broker, agent or counterparty; or

  2. (2)

    return the money to, or to the order of, the client.

Notification to the FSA: failure of a bank, intermediate broker, settlement agent or OTC counterparty

CASS 4.3.64R

On the failure of a third party with which money is held, a firm must notify the FSA:

  1. (1)

    as soon as it becomes aware of the failure of any bank, intermediate broker, settlement agent, OTC counterparty or other entity with which it has placed, or to which it has passed, client money; and

  2. (2)

    as soon as reasonably practical, whether it intends to make good any shortfall that has arisen or may arise and of the amounts involved.

Client money calculation

CASS 4.3.65G

The purpose of the client money calculation is:

  1. (1)

    for the normal approach, to act as a check that the amount of client money that is segregated at banks and third parties is sufficient to meet the firm's obligations to its clients on a daily basis;

  2. (2)

    for the alternative approach, to calculate the appropriate amount of client money to be segregated at banks and third parties which is sufficient to meet a firm's obligations to its clients on a daily basis.

CASS 4.3.66R

Each business day, a firm that adopts the normal approach in accordance with CASS 4.3.8 R must:

  1. (1)

    check whether its client money resource, being the aggregate balance on the firm'sclient bank accounts, as at the close of business on the previous business day, was at least equal to the client money requirement, as defined in CASS 4.3.71 R, as at the close of business on that day; and

  2. (2)

    ensure that:

    1. (a)

      any shortfall is paid into a client bank account by the close of business on the day the calculation is performed; or

    2. (b)

      any excess is withdrawn within the same time period unless CASS 4.3.5 R or CASS 4.3.6 R applies.

CASS 4.3.67R

Each business day, a firm that adopts the alternative approach, in accordance with CASS 4.3.8 R, must ensure that its client money resource, being the aggregate balance on the firm's client bank accounts, as at the close of business on that business day is at least equal to the client money requirement, as defined in CASS 4.3.71 R, as at the close of business on the previous business day.

CASS 4.3.68G

No excess or shortfall should arise when adopting the alternative approach.

CASS 4.3.69G

If a firm is operating under the alternative approach allowed by CASS 4.3.8 R, and draws a cheque on its own bank account, it will be expected to account for those cheques that have not yet cleared under CASS 4.3.101 R when performing the client money calculation in CASS 4.3.67 R. An historic average estimate of uncleared cheques may be used to satisfy this obligation.

CASS 4.3.70G

For the purposes of CASS 4.3.66 R and CASS 4.3.67 R, a firm should use the values contained in its accounting records, for example its cash book, rather than values contained in statements received from its banks and other third parties.

Client money requirement

CASS 4.3.71R

The client money requirement is either:

  1. (1)

    (subject to CASS 4.3.85 R) the sum of, for all clients:

    1. (a)

      the individual client balances calculated in accordance with CASS 4.3.72 R, excluding:

      1. (i)

        individual client balances which are negative (that is, debtors); and

      2. (ii)

        clients' equity balances calculated in accordance with CASS 4.3.79 R; and

    2. (b)

      the total margined transaction requirement, calculated in accordance with CASS 4.3.81 R; or

  2. (2)

    the sum of:

    1. (a)

      for each client bank account:

      1. (i)

        the amount which the firm's records show as held on that account; and

      2. (ii)

        an amount that offsets each negative net amount which the firm's records show attributed to that account for an individual client; and

    2. (b)

      the total margined transaction requirement, which is calculated in accordance with CASS 4.3.81 R.

General transactions

CASS 4.3.72R

The individual client balance for each client is calculated in accordance with CASS 4.3.73 R.

CASS 4.3.73R

This table belongs to CASS 4.3.72 R.

Individual client balance calculation

Free money (no trades) and

A

sale proceeds due to the client:

(a)

in respect of principal deals when the client has delivered the designated investments; and

B

(b)

in respect of agency deals, when either:

(i)

the sale proceeds have been received by the firm and the client has delivered the designated investments; or

C1

(ii)

the firm holds the designated investments for the client; and

C2

the cost of purchases:

(c)

in respect of principal deals, paid for by the client but the firm has not delivered the designated investments to the client; and

D

(d)

in respect of agency deal, paid for by the client when either:

(i)

the firm has not remitted the money to, or to the order of, the counterparty; or

E1

(ii)

the designated investments have been received by the firm but have not been delivered to the client;

E2

Less

money owed by the client in respect of unpaid purchases by or for the client if delivery of those designated investments has been made to the client; and

F

Proceeds remitted to the client in respect of sales transactions by or for the client if the client has not delivered the designated investments.

G

Individual Client Balance 'X' = (A+B+C1+C2+D+E1+E2)-F-G

X

CASS 4.3.74R

In CASS 4.3.72 R a firm must calculate the individual client balance using the contract value of any client purchases or sales.

CASS 4.3.75R

A firm may choose to segregate designated investments instead of the value identified in CASS 4.3.73 R (except E1) if it ensures that the designated investments are held in such a manner that the firm cannot use them for its own purposes.

CASS 4.3.76G

Segregation in the context of CASS 4.3.75 R can take many forms, including the holding of a safe custody investment in a nominee name and the safekeeping of certificates evidencing title in a fire resistant safe. It is not the intention that all the custody rules should be applied to designated investments held in the course of settlement.

CASS 4.3.77G

In determining the client money requirement under CASS 4.3.71 R, a firm need not include money held in accordance with CASS 4.1.15 R and CASS 4.1.16 R (delivery versus payment).

CASS 4.3.78G

Firms are reminded of the provisions of CASS 4.3.10 R and CASS 4.3.12 R which require a firm to segregate client money into client bank accounts within a certain period. In determining the client money requirement under CASS 4.3.71 R, a firm:

  1. (1)

    should include dividends received and interest earned and allocated;

  2. (2)

    may deduct outstanding fees, calls, rights and interest charges and other amounts owed by the client in accordance with CASS 4.1.20 E;

  3. (3)

    need not include client money which, under CASS 4.3.21 R(2), is not required to be segregated nor include client money forwarded to the firm, in accordance with CASS 4.3.17 R, but not received;

  4. (4)

    should take into account any client money arising from CASS 4.3.95 R; and

  5. (5)

    should include any unallocated client money.

Equity balance

CASS 4.3.79R

[deleted]4

4
CASS 4.3.80R

A firm's equity balance, whether with an exchange, intermediate broker or OTC counterparty, means the amount which the firm would be liable to pay to the exchange, intermediate broker or OTC counterparty (or vice versa) in respect of the firm'smargined transactions if each of the open positions of the firm's clients was liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and the firm's account with the exchange, intermediate broker or OTC counterparty is closed.

Margined transaction requirement

CASS 4.3.81R

The total margined transaction requirement is:

  1. (1)

    the sum of each of the client's equity balance4 which are positive;

    4

Less

  1. (2)

    the proportion of any individual negative client equity balance4 which is secured by approved collateral; and

    4
  2. (3)

    the net aggregate of the firm's equity balance (negative balances being deducted from positive balances) on transaction accounts for clients4 with exchanges, clearing houses, intermediate brokers and OTC counterparties.

    4
CASS 4.3.82G

To meet a shortfall that has arisen in respect of the requirement in CASS 4.3.71 R(2), a firm may utilise its own approved collateral provided it is held on terms specifying when it is to be realised for the benefit of clients, it is clearly identifiable from the firm's own property and the relevant terms are evidenced in writing by the firm. In addition, the proceeds of the sale of that collateral should be paid into a client bank account.

CASS 4.3.83G

If a firm's total margined transaction requirement is negative, the firm should treat it as zero for the purposes of calculating its client money requirement in accordance with CASS 4.3.71 R(2).

CASS 4.3.84G

The terms 'client equity balance'4 and 'firm's equity balance' in CASS 4.3.80 R refer to cash values and do not include non-cash collateral or other designated investments held in respect of a margined transaction.

4

Reduced client money requirement option

CASS 4.3.85R
  1. (1)

    When, in respect of a client, there is a positive individual client balance and a negative client equity balance,4 a firm may offset the credit against the debit and hence have a reduced individual client balance in CASS 4.3.72 R for that client.

    4
  2. (2)

    When, in respect of a client, there is a negative individual client balance and a positive client equity balance,4 a firm may offset the credit against the debit and hence have a reduced client equity balance4 in CASS 4.3.81 R for that client.

    44
CASS 4.3.86G

The effect of CASS 4.3.85 R is to allow a firm to offset, on a client by client basis, a negative amount with a positive amount arising out of the calculations in CASS 4.3.72 R and CASS 4.3.81 R, and, by so doing, reduce the amount the firm is required to segregate.

Failure to perform calculations

CASS 4.3.87R

A firm must notify the FSA immediately if it is unable to, or does not, perform the daily calculation required by CASS 4.3.66 R or CASS 4.3.67 R.

CASS 4.3.88R

A firm must notify the FSA immediately it becomes aware that it may not be able to make good any shortfall identified by CASS 4.3.66 R by the close of business on the day the calculation is performed.

Reconciliation of client money balances: frequency of reconciliation

CASS 4.3.89R

A firm must perform a reconciliation of the client money balances which it holds, or for which it is responsible, as frequently as is necessary to ensure the accuracy of its record of money so held, and no less than once in every 25 business days.

CASS 4.3.90G

In determining whether the minimum acceptable frequency is sufficient, a firm should consider the risks to which the business is exposed, such as the volume of business, and where and with whom the client money is held.

CASS 4.3.91R

A firm must complete the reconciliation of client money within ten business days of the date to which the reconciliation relates.

Reconciliation method

CASS 4.3.92R

A firm must compare:

  1. (1)

    the balance on each client bank account as recorded by the firm with the balance on that account as set out on the statement or other form of confirmation issued by the bank with which those accounts are held; and

  2. (2)

    the balance, currency by currency, on each client transaction account as recorded by the firm, with the balance on that account as set out in the statement or other form of confirmation issued by the person with whom the account is held;

and identify any discrepancies between them.

CASS 4.3.93R

Any approved collateral held in accordance with the client money rules must be included within this reconciliation.

Reconciliation discrepancies

CASS 4.3.94R

When any discrepancy arises as a result of the reconciliation carried out under CASS 4.3.92 R, the firm must identify the reason for the discrepancy and correct it as soon as possible, unless the discrepancy arises solely as a result of timing differences between the accounting systems of the party providing the statement or confirmation and that of the firm.

CASS 4.3.95R

While a firm is unable to resolve a difference arising from a reconciliation, and one record or a set of records examined by the firm during its reconciliation indicates that there is a need to have a greater amount of client money or approved collateral than is in fact the case, the firm must assume, until the matter is finally resolved, that the record or set of records is accurate and pay its own money into a relevant account.

CASS 4.3.96G

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

CASS 4.3.97R

A firm must notify the FSA as soon as possible if it is unable to comply with any of the requirements of CASS 4.3.89 R, CASS 4.3.91 R, CASS 4.3.92 R, CASS 4.3.94 R and CASS 4.3.95 R.

Discharge of fiduciary duty

CASS 4.3.98G

The purpose of CASS 4.3.99 R to CASS 4.3.102 R is to set out those situations in which a firm will have fulfilled its contractual and fiduciary obligations in relation to any client money held for or on behalf of its client, or 3in relation to the firm's ability to require repayment of that money from a third party3.

CASS 4.3.99R

Money ceases to be client money if it is paid:

  1. (1)

    to the client, or a duly authorised representative of the client; or

  2. (2)

    to a third party on the instruction of the client, unless it is transferred to a third party in the course of effecting a transaction, in accordance with CASS 4.3.30 R; or

  3. (3)

    into a bank account of the client (not being an account which is also in the name of the firm); or

  4. (4)

    to the firm itself, when it is due and payable to the firm in accordance with CASS 4.1.19 R to CASS 4.1.24 G; or

  5. (5)

    to the firm itself, when it is an excess in the client bank account as set out in CASS 4.3.66 R(2)(b).

CASS 4.3.100G

When a firm wishes to transfer client money balances to a third party in the course of transferring its business to another firm, it should do so in compliance with CASS 4.3.99 R.

CASS 4.3.101R

When a firm draws a cheque or other payable order to discharge its fiduciary duty under CASS 4.3.99 R, it must continue to treat the sum concerned as client money until the cheque or order is presented and paid by the bank.

CASS 4.3.102R

For the purposes of CASS 4.1.19 R, if a firm makes a payment to, or on the instructions of, a client, from an account other than a client bank account, until that payment has cleared, no equivalent sum from a client bank account for reimbursement will become due and payable to the firm.

Allocated but unclaimed client money

CASS 4.3.103G

The purpose of CASS 4.3.104 R is to allow a firm, in the normal course of its business, to cease to treat as client money any balances, allocated to an individual client, when those balances remain unclaimed.

CASS 4.3.104R

A firm may cease to treat as client money any unclaimed client money balance if it can demonstrate that it has taken reasonable steps to trace the client concerned and to return the balance.

CASS 4.3.105E
  1. (1)

    Reasonable steps should include:

    1. (a)

      entering into a written agreement, in which the client consents to the firm releasing, after the period of time specified in (b), any client money balances, for or on behalf of that client, from client bank accounts;

    2. (b)

      determining that there has been no movement on the client's balance for a period of at least six years (notwithstanding any payments or receipts of charges, interest or similar items);

    3. (c)

      writing to the client at the last known address informing the client of the firm's intention of no longer treating that balance as client money, giving the client 28 days to make a claim;

    4. (d)

      making and retaining records of all balances released from client bank accounts; and

    5. (e)

      undertaking to make good any valid claim against any released balances;

  2. (2)

    Compliance with (1) may be relied on as tending to establish compliance with CASS 4.3.104 R;

  3. (3)

    Contravention of (1) may be relied on as tending to establish contravention of CASS 4.3.104 R.

CASS 4.3.106G

When a firm gives an undertaking in CASS 4.3.105 E(1)(e), it should make arrangements authorised by the firm's relevant controllers that are legally enforceable by any person with a valid claim to such money.

Commodity 2Futures Trading Commission Part 30 exemption order

CASS 4.3.106AG

2United States (US) legislation restricts the ability of non-US firms to trade on behalf of US customers on non-US futures and options exchanges. The relevant US regulator (the CFTC) operates an exemption system for firms authorised by the FSA. The FSA sponsors the application from a firm for exemption from Part 30 of the General Regulations under the US Commodity Exchange Act in line with this system. The application forms and associated information can be found on the FSA website in the "Forms" section.

CASS 4.3.107G

2A firm with a Part 30 exemption order undertakes to the CFTC that it will refuse to allow any US customer to opt not to have his money treated as client money if it is held or received in respect of transactions on non-US exchanges, unless that US customer is an "eligible contract participant" as defined in section 1a(12) of the Commodity Exchange Act, 7 U.S.C. In doing so, the firm is representing that it will not make use of the opt-out arrangements in CASS 4.1.8 G to CASS 4.1.11 R in relation to that business.

CASS 4.3.108R

A firm with a Part 30 exemption order which also operates an LME bond arrangement for the benefit of US-resident investors, must exclude the client's equity balance4 for transactions undertaken on the London Metal Exchange on behalf of those US-resident investors from the calculation required by CASS 4.3.81 R.

4
CASS 4.3.109R

A firm must not reduce the amount of, or cancel a letter of credit issued under, an LME bond arrangement where this will cause the firm to be in breach of its Part 30 exemption order.

CASS 4.3.110R

A firm must notify the FSA immediately it arranges the issue of an individual letter of credit under an LME bond arrangement.

Records

CASS 4.3.111R

A firm must ensure that proper records, sufficient to show and explain the firm's transactions and commitments in respect of its client money, are made and retained for a period of three years after they were made.