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CASS 6.3 Depositing assets and arranging for assets to be deposited with third parties2

Depositing safe custody assets with third parties6

CASS 6.3.1RRP
  1. (1)

    1A firm may deposit safe custody assets 2 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 safe custody assets.2

    22
  2. (1A)

    [deleted]6

    6
  3. (2)

    [deleted]6

    6
  4. (3)

    When a firm makes the selection, appointment and conducts the periodic review referred to 2under this rule, it must take into account:

    1. (a)

      the expertise and market reputation of the third party; and

    2. (b)

      any legal requirements or market practices related to the holding of those safe custody assets 2 that could adversely affect clients' rights.

      2
  5. (4)

    [deleted]6

    6

[Note: article 17(1) of the MiFID implementing Directive]

CASS 6.3.2GRP

In discharging its obligations under CASS 6.3.1 R,6 a firm should also consider, as appropriate,6 together with any other relevant matters:

6
  1. (1)

    the third party's performance of its services to the firm;

    6
  2. (2)

    the arrangements that the third party has in place for holding and safeguarding the safe custody asset;2

    2
  3. (3)

    current industry standard reports, for example "Assurance reports on internal controls of services organisations made available to third parties" made in line with Technical Release AAF 01/06 of The Institute of Chartered Accountants in England and Wales or6 equivalent;

    6
  4. (4)

    the capital or financial resources of the third party;

  5. (5)

    the credit-worthiness6 of the third party;

    6
  6. (6)

    any other activities undertaken by the third party and, if relevant, any affiliated company; and6

  7. (7)

    whether the third party has the appropriate regulatory permissions.6

CASS 6.3.2ARRP
  1. (1)

    6A firm must make a record of the grounds upon which it satisfies itself as to the appropriateness of its selection and appointment of a third party under CASS 6.3.1 R. The firm must make the record on the date it makes the selection or appointment and must keep it from that date until five years after the firm ceases to use the third party to hold safe custody assets belonging to clients.

  2. (2)

    A firm must make a record of each periodic review of its selection and appointment of a third party that it conducts under CASS 6.3.1 R, its considerations and conclusions. The firm must make the record on the date it completes the review and must keep it from that date until five years after the firm ceases to use the third party to hold safe custody assets belonging to clients.

CASS 6.3.3G

[deleted]6

CASS 6.3.4RRP
  1. (1)

    Subject to (2), a6 firm must only deposit safe custody assets 2 with a third party in a jurisdiction which specifically regulates and supervises the safekeeping of safe custody assets 2 for the account of another person with a third party who is subject to such regulation.

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  2. (2)

    A firm must not deposit safe custody assets 2 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 safe custody assets 2 for the account of another person unless:

    22
    1. (a)

      the nature of the safe custody assets 2 or of the investment services connected with those safe custody assets 2 requires them to be deposited with a third party in that third country; or

      22
    2. (b)

      the safe custody assets 2 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.

      2
  3. (3)

    [deleted]2

    2
    1. (a)

      [deleted]2

      2
    2. (b)

      [deleted]2

      2
      1. (i)

        [deleted]2

        2
      2. (ii)

        [deleted]2

        2
      3. (iii)

        [deleted]2

        2

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

CASS 6.3.4A-1RRP

6A firm must take the necessary steps to ensure that any client's safe custody assets deposited with a third party are identifiable separately from the applicable assets belonging to the firm and from the applicable assets 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.

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

Third-party custody agreements6

CASS 6.3.4ARRP

6A firm must have entered into a written agreement with any person with whom it deposits clients' safe custody assets under CASS 6.3.1 R, or with whom it arranges safeguarding and administration of assets which are clients' safe custody assets. This agreement must, at minimum:

  1. (1)

    set out the binding terms of the arrangement between the firm and the third party;

  2. (2)

    be in force for the duration of that arrangement; and

  3. (3)

    clearly set out the custody service(s) that the third party is contracted to provide.

CASS 6.3.4BGRP

6A firm should consider carefully the terms of any agreement entered into with a third party under CASS 6.3.4A R. The following terms are examples of the issues that should be addressed in these agreements (where relevant):

  1. (1)

    that the title of the account in the third party's books and records indicates that any safe custody asset credited to it does not belong to the firm;

  2. (2)

    that the third party will hold or record a safe custody asset belonging to the firm's client separately from any applicable asset belonging to the firm or to the third party;

  3. (3)

    the arrangements for registration or recording of the safe custody asset, if this will not be registered in the firm's client's name;

  4. (4)

    the restrictions over the circumstances in which the third party may withdraw assets from the account;

  5. (5)

    the procedures and authorities for the passing of instructions to, or by, the firm;

  6. (6)

    the procedures for the claiming and receiving of dividends, interest payments and other entitlements accruing to the firm's client; and

  7. (7)

    the provisions detailing the extent of the third party's liability in the event of the loss of a safe custody asset caused by the fraud, wilful default or negligence of the third party or an agent appointed by him.

CASS 6.3.5R

Subject to CASS 6.3.6 R, in relation to a third party with which a firm deposits safe custody assets belonging to a client, a firm must ensure that any5 agreement with that third party relating to the custody of those assets does not include the grant to that party, or to any other person, of a lien or a right of retention or sale over the safe custody assets, or a right of set-off over any client money derived from those safe custody assets.3

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CASS 6.3.6R

A firm may conclude an agreement with a third party relating to the custody of safe custody assets which confers on that5 party, or on another person instructed by that party to provide custody services for those assets,5 a lien, right of retention or sale, or right of set-off in favour of that party or that other person only if that lien or right:

555
  1. (1)

    is confined to those safe custody assets held in an account with that third party or that other person and extends only to5 properly incurred charges and liabilities arising from the provision of custody services in respect of safe custody assets held in that account; or5

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  2. (2)

    arises under the operating terms of a securities depository, securities settlement system or central counterparty in whose account safe custody assets5 are recorded or held, and provided that it does so for the purpose only of facilitating the settlement of trades involving the assets held in that account; or5

    55
  3. (3)

    arises in relation to those safe custody assets5 held in a jurisdiction outside the United Kingdom,5 provided that:

    5
    1. (a)

      it does so as a result of local applicable law in that jurisdiction or is necessary for that firm to gain access to the local market in that jurisdiction;5 and

      5
    2. (b)

      in respect of each client to which those assets belong, either:5

      1. (i)

        the firm has taken reasonable steps to determine that holding those assets subject to that lien or right is in the best interests of that client; or5

      2. (ii)

        where a client is a professional client, the firm is instructed by that client to hold those assets in that jurisdiction notwithstanding the existence of that lien or right.5

CASS 6.3.7G

5A firm will be considered to be acting on the instructions of its professional client under CASS 6.3.6R (3)(b)(ii) where:

  1. (1)

    the firm has received an individual instruction or has a standing instruction in its terms of business which results in it holding safe custody assets in the relevant jurisdiction; and

  2. (2)

    prior to acting on the instruction, the firm has expressly informed the client that holding that client's safe custody assets in the relevant jurisdiction will involve the granting of a lien or right over those assets. The firm may do this by discussing the lien or right individually with the client or by including reference to it in terms of business (which may themselves cross refer to a separate list of relevant jurisdictions to which CASS 6.3.6R (3)(a) applies maintained on the firm's website in a form accessible to clients) or by a similar method.

CASS 6.3.8R

5For the purpose of CASS 6.3.6 R, references to a safe custody asset include any client money derived from that safe custody asset. Client money derived from a safe custody asset may be regarded as held in the same account as that safe custody asset even though that money and those assets may be recorded separately.

CASS 6.3.9RRP

5CASS 6.3.6 R does not permit a firm to agree to a third party having any recourse or right against client money in a client bank account or standing to the credit of a client transaction account of the kind referred to in:7

7
  1. (1)

    paragraph (d) of CASS 7 Annex 2R; or7

  2. (2)

    paragraph (e) of CASS 7 Annex 3R; or7

  3. (3)

    paragraph (e) of CASS 7 Annex 4R.7