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CASS 6.1 Application

CASS 6.1.1 R

This chapter (the custody rules) applies to a firm:21

  1. (1)

    [deleted]2

    2
    1. (a)

      [deleted]2

      2
    2. (b)

      [deleted]2

      2
  2. (1A)

    2when it holds financial instruments belonging to a client in the course of its MiFID business;

    7
  3. (1B)

    2when it is safeguarding and administering investments, in the course of business that is not MiFID business;7

  4. (1C)

    when it is acting as trustee or depositary of an AIF; 7

    9
  5. (1D)

    when it is acting as trustee or depositary of a UCITS; and97

  6. (1E)

    in respect of any arrangement for a client to transfer full ownership of a safe custody asset to the firm which is:

    1. (a)

      in the course of, or in connection with, the firm'sdesignated investment business; and

    2. (b)

      for the purpose of securing or otherwise covering present or future, actual or contingent or prospective obligations,

    but the application of the custody rules to a firm under this paragraph is limited to the rules and guidance in CASS 6.1.6 R to CASS 6.1.9 G; and10

    9
  7. (1F)

    when it is a small AIFM carrying on excluded custody activities.10

  8. (2)

    [deleted]2

    2
CASS 6.1.1-A R

10In applying the custody rules to a small AIFM'sexcluded custody activities, any reference to a firm carrying on the regulated activities of safeguarding and administering investments, safeguarding and administering assets (without arranging) or arranging safeguarding and administration of assets includes those excluded custody activities that would, but for the exclusion in article 72AA of the RAO, amount to whichever of those regulated activities is referred to.

CASS 6.1.1A G

2The regulated activity of safeguarding and administering investments covers both the safeguarding and administration of assets (without arranging) andarranging safeguarding and administration of assets,5 when those assets are either safe custody investments or custody assets. A safe custody investment is, in summary, a designated investment which a firm receives or holds on behalf of a client. Custody assets include designated investments, and any other assets that the firm holds or may hold in the same portfolio as a designated investment held for or on behalf of a client.5

CASS 6.1.1B R
  1. (1)

    Firms to which the custody rules apply by virtue of CASS 6.1.1R (1B) or (1E) 12must also apply the custody rules to those custody assets which are not safe custody investments in a manner appropriate to the nature and value of those custody assets.10

  2. (2)

    Firms to which the custody rules apply by virtue of CASS 6.1.1R (1C) must also apply the custody rules:10

    1. (a)

      to those custody assets which are not AIF custodial assets but are safe custody investments; and

    2. (b)

      in a manner appropriate to the nature and value of those custody assets, to those custody assets which are neither AIF custodial assets nor safe custody investments.

  3. (3)

    12Firms to which the custody rules apply by virtue of CASS 6.1.1R(1D) must also apply them:

    1. (a)

      to those custody assets which are not UCITS custodial assets but are safe custody investments; and

    2. (b)

      in a manner appropriate to the nature and value of those custody assets, to those custody assets which are neither UCITS custodial assets nor safe custody investments.

CASS 6.1.1C G

2In accordance with article 42 of the Regulated Activities Order, a firm ("I") will not be arranging safeguarding and administration of assets if it introduces a client to another firm whose permitted activities include the safeguarding and administration of investments, or to an exempt person acting as such, with a view to that other firm or exempt person:

  1. (1)

    providing a safe custody service in the United Kingdom; or

  2. (2)

    arranging for the provision of a safe custody service in the United Kingdom by another person;

and the other firm, exempt person or other person who is to provide the safe custody service is not in the same group as I, and does not remunerate I.

CASS 6.1.2 G

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,2 should be held in accordance with the client money chapter where appropriate.

2
CASS 6.1.3 G

[deleted]2

2

Business in the name of the firm

CASS 6.1.4 R

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]

CASS 6.1.5 G

For example, this chapter does not apply where a firm borrows safe custody assets2 from a client as principal under a stock lending agreement.

2

Title transfer collateral arrangements

CASS 6.1.6 R
2 4
  1. (1)

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

    [Note: recital 27 to MiFID]

    4
  2. (2)

    4Excepted from (1) is a transfer of the full ownership of a safe custody asset:

    1. (a)

      belonging to a retail client;

    2. (b)

      whose purpose is to secure or otherwise cover that client's present or future, actual, contingent or prospective obligations under a contract for differences or6 a rolling spot forex contract that is a future, and in either case where that contract is6 entered into with a firm acting as market maker; and

    3. (c)

      which is made to that firm or to any other personarranging on its behalf.

CASS 6.1.6A R
  1. (1)

    4Subject to (2), where a firm makes arrangements for the purpose of securing or otherwise covering present or future, actual, contingent or prospective obligations of a retail client those arrangements must not provide for the taking of a transfer of full ownership of any of that client'ssafe custody assets.

  2. (2)

    The application of (1) is confined to the taking of a transfer of full ownership:

    1. (a)

      whose purpose is to secure or otherwise cover that retail client's obligations under a contract for differences or6a rolling spot forex contract that is a future, and in either case where that contract is6 entered into with a firm acting as market maker; and

    2. (b)

      which is made to that firm or to any other person arranging on its behalf.

CASS 6.1.6B R
  1. (1)

    9A firm must ensure that any arrangement relating to the transfer of full ownership of a client'ssafe custody asset to the firm for the purposes set out in CASS 6.1.6R (1) and CASS 6.1.6AR (1) is the subject of a written agreement made on a durable medium between the firm and the client.

  2. (2)

    Regardless of the form of the agreement in (1) (which may have additional commercial purposes), it must cover the client's agreement to:

    1. (a)

      the terms for the arrangement relating to the transfer of the client's full ownership of the safe custody asset to the firm;

    2. (b)

      any terms under which the ownership of the safe custody asset is to transfer from the firm back to the client; and

    3. (c)

      (to the extent not covered by the terms under (b)), any terms for the termination of:

      1. (i)

        the arrangement under (a); or

      2. (ii)

        the overall agreement in (1).

  3. (3)

    A firm must retain a copy of the agreement under (1) from the date the agreement is entered into and until five years after the agreement is terminated.

CASS 6.1.6C G

9The terms referred to in CASS 6.1.6BR (2)(b) may include, for example, terms under which the arrangement relating to the transfer of full ownership of the safe custody asset to the firm is not in effect from time to time, or is contingent on some other condition.

CASS 6.1.7 G

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.

CASS 6.1.8 G

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.

Termination of title transfer collateral arrangements9

CASS 6.1.8A R
  1. (1)

    9If a client communicates to a firm that it wishes (whether pursuant to a contractual right or otherwise) to terminate an arrangement relating to the transfer of full ownership of its safe custody asset to a firm for the purposes set out in CASS 6.1.6R (1) and CASS 6.1.6AR (1) and the client's communication is not in writing, the firm must make a written record of the client's communication which also records the date the communication was received.

  2. (2)

    A firm must keep a client's written communication, or a written record of the client's communication in (1), for five years, starting from the date the communication was received by the firm.

  3. (3)
    1. (a)

      If a firm agrees to the termination of an arrangement relating to the transfer of full ownership of a client'ssafe custody asset to the firm, it must notify the client of its agreement in writing. The notification must state when the termination is to take effect and whether or not the client'ssafe custody asset will be held under the custody rules by the firm thereafter.

    2. (b)

      If a firm does not agree to terminate an arrangement relating to the transfer of full ownership of a client'ssafe custody asset to the firm, it must notify the client of its disagreement in writing.

  4. (4)

    A firm must keep a written record of any notification it makes to a client under (3) for a period of five years, starting from the date the notification was made.

CASS 6.1.8B G

9 CASS 6.1.8AR (3)(a) refers only to a firm's agreement to terminate an existing arrangement relating to the transfer of full ownership of a client'ssafe custody asset to the firm. Such agreement by a firm does not necessarily need to amount to the termination of its entire agreement with the client.

CASS 6.1.8C G

9When a firm notifies a client under CASS 6.1.8AR (3)(a) of when the termination of an arrangement relating to the transfer of full ownership of the safe custody asset to a firm is to take effect, it should take into account:

  1. (1)

    any relevant terms relating to such a termination that have been agreed with the client; and

  2. (2)

    the period of time it reasonably requires to return the safe custody asset to the client or to update the registration under (Holding of client assets) CASS 6.2and update its records under CASS 6.6 (Records, accounts and reconciliations).

CASS 6.1.8D R

9If an arrangement relating to the transfer of full ownership of safe custody assets to a firm for the purposes set out in CASS 6.1.6R (1) and CASS 6.1.6AR (1) is terminated, then the exemption at CASS 6.1.6R (1) no longer applies.

CASS 6.1.8E G
  1. (1)

    9Following the termination of an arrangement relating to the transfer of full ownership of safe custody assets to a firm for the purposes set out in CASS 6.1.6R (1) and CASS 6.1.6AR (1), where a firm does not immediately return the safe custody assets to the client the firm should consider whether the custody rules apply in respect of the safe custody assets pursuant to CASS 6.1.1R (1A) to CASS 6.1.1R (1C).

  2. (2)

    Where the custody rules apply to a firm for safe custody assets in these circumstances then the firm is required to comply with those rules and should, for example, update the registration under CASS 6.2(Holding of client assets), update its records under CASS 6.6 (Records, accounts and reconciliations) and treat any shortfall in accordance with CASS 6.6.54 R (in each case as appropriate).

CASS 6.1.9 G

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.

Prime brokerage agreements

CASS 6.1.9A G

3A prime brokerage firm is reminded of the additional obligations in CASS 9.3.1 R which apply to prime brokerage agreements.

Affiliated companies - MiFID business2

CASS 6.1.10 G

The fact that a client is an affiliated company in respect of MiFID business2 does not affect the operation of the custody rules in relation to that client.

Affiliated companies - non-MiFID business2

CASS 6.1.10A G

[deleted]9

CASS 6.1.10B R

9In respect of a firm's business falling under CASS 6.1.1R (1B), the custody rules do not apply to the firm when it is safeguarding and administering investments on behalf of an affiliated company, unless:

  1. (1)

    the firm has been notified that the designated investment belongs to a client of the affiliated company; or

  2. (2)

    the affiliated company is a client dealt with at arm's length.

CASS 6.1.11 G

[deleted]2

2

Delivery versus payment transaction exemption9

CASS 6.1.12 R
  1. (1)

    Subject to (2) and CASS 6.1.12B R and with the written agreement of the relevant client, a9firm need not treat this chapter as applying in respect of a delivery versus payment transaction through a commercial settlement system if:9

    929
    1. (a)

      in respect of a client's purchase, the firm intends for the asset in question to be due to the client within one business day following the client's fulfilment of its payment obligation to the firm;9 or

      9
    2. (b)

      in respect of a client's sale, the firm intends for the asset in question to be due to the firm within one business day following the firm's fulfilment of its payment obligation to the client.9

      9
    9
  2. (2)

    If the payment or delivery by the firm to the client has not occurred by the close of business on the third business day following the date on which a firm makes use of the exemption under (1), the firm must stop using that exemption for the transaction.9

    9
  3. (3)

    If the period referred to in CASS 6.1.12R (2) has expired before such a delivery versus payment transaction through a commercial settlement system has settled, a firm may, until settlement and provided that doing so is consistent with the firm'spermissions and it complies with (4), segregate the firm's own money as client money (in accordance with the client money rules) of an amount equivalent to the value at which that safe custody asset is reasonably expected to settle instead of holding the client'ssafe custody assets (in accordance with the custody rules).9

  4. (4)

    Where a firm intends to segregate money as client money instead of the client'ssafe custody asset under (3) it must, before doing so, ensure that this would result in money being held for the relevant client in respect of the shortfall under 9CASS 7.17.2R11 (statutory trust).9

  5. (5)

    Where a firm segregates an amount of client money instead of the client'ssafe custody assets under (3) it must also:

    1. (a)

      ensure the money is segregated under 9CASS 7.139 (Segregation of client money) and recorded as being held for the relevant client(s) under 9CASS 7.15 (Records, accounts and reconciliations);

    2. (b)

      keep a record of the actions the firm has taken under this rule which includes a description of the safe custody asset in question, identifies the relevant affected client, and specifies the amount of money that the firm has appropriated as client money to cover the value of the safe custody asset; and

    3. (c)

      update the record made under (5)(b) when the transaction in question has settled and the firm has re-appropriated the money.9

CASS 6.1.12A G
  1. (1)

    9The amount of client money a firm segregates for the purposes of CASS 6.1.12R (3) may be determined by the previous day's closing mark to market valuation of the relevant safe custody asset or, if in relation to a particular safe custody asset none is available, the most recent available valuation.

  2. (2)

    Where a firm is segregating money for the purposes of CASS 6.1.12R (3) it should, as regularly as necessary, and having regard to Principle 10:

    1. (a)

      review the value of the safe custody asset in question in line with (1); and

    2. (b)

      where the firm has found that the value of the safe custody asset has changed, adjust the amount of money it has appropriated to ensure that these monies are sufficient to cover the latest value of the safe custody asset.

CASS 6.1.12B R

9A firm cannot, in respect of a particular delivery versus payment transaction, make use of the exemption under CASS 6.1.12 R in either or both of the following circumstances:

  1. (1)

    it is not a direct member or participant of the relevant commercial settlement system, nor is it sponsored by such a member or participant, in accordance with the terms and conditions of that commercial settlement system;

  2. (2)

    the transaction in question is being settled by another person on behalf of the firm through an account held at the relevant commercial settlement system by that other person.

CASS 6.1.12C G

9Where a firm does not meet the requirements in CASS 6.1.12 R or CASS 6.1.12B R for use of the exemption in CASS 6.1.12 R, the firm is subject to the custody rules in respect of any safe custody asset it holds in connection with the delivery versus payment transaction in question.

CASS 6.1.12D G
  1. (1)

    9In line with CASS 6.1.12 R, where a firm receives a safe custody asset from a client in respect of a delivery versus payment transaction the firm is carrying out through a commercial settlement system in respect of a client's sale, and the firm has not fulfilled its payment obligation to the client by close of business on the third business day following the date of the client's fulfilment of its delivery obligation to the firm, the firm should consider whether the custody rules apply in respect of the safe custody asset pursuant to CASS 6.1.1R (1A) to CASS 6.1.1R (1D).

  2. (2)

    Upon settlement of a delivery versus payment transaction a firm is carrying out through a commercial settlement system (including when it is settled within the three business day period referred to in CASS 6.1.12 R), in respect of:

    1. (a)

      a client's purchase, the custody rules apply to the relevant safe custody asset the firm receives upon settlement; and

    2. (b)

      a client's sale, the client money rules will apply to the relevant money received on settlement.

CASS 6.1.12E R
  1. (1)

    9If a firm makes use of the exemption under CASS 6.1.12 R, it must obtain the client's written agreement to the firm's use of this exemption.

  2. (2)

    In respect of each client, the written agreement in (1) must be retained during the time that the firm makes use, or intends to make use, of the exemption under CASS 6.1.12 R in respect of that client'ssafe custody assets.

CASS 6.1.13 G

[deleted]2

2
CASS 6.1.14 G

[deleted]2

2

Temporary handling of safe custody assets2

CASS 6.1.15 G

The custody rules do not apply if a firm temporarily handles a safe custody asset2 belonging to a client. A firm should temporarily handle a safe custody asset2 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 safe custody assets2 in bearer form, the firm is expected to handle them for less than one business day. When a firm temporarily handles safe custody assets,2 it is still obliged to comply with Principle 10 (Clients' assets).

2 2 2 2
CASS 6.1.16 G

When a firm temporarily handles a safe custody asset,2 in order to comply with its obligation to act in accordance with Principle 10 (Clients' assets), the following are guides to good practice:

2
  1. (1)

    a firm should keep the safe custody asset2 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
  2. (2)

    a firm should make and retain a record of the fact that the firm has handled that safe custody asset2 and of the details of the client concerned and of any action the firm has taken.

    2

Exemptions which do not apply to MiFID business

CASS 6.1.16A R

2The exemptions in CASS 6.1.16B R to CASS 6.1.16D G do not apply to a MiFID investment firm which holds financial instruments belonging to a client in the course of MiFID business.

CASS 6.1.16B R

[deleted]7

7

Managers of AIFs and UCITS

CASS 6.1.16BA G
10
  1. (1)

    The custody rules do not apply to a firm that is managing an AIF or managing a UCITS in relation to excluded custody activities, except where the firm is a small AIFM.10

  2. (2)

    The custody rules can apply to a firm that is managing an AIF or managing a UCITS in relation to activities that are not excluded custody activities. For example, where the firm:10

    1. (a)

      holds financial instruments belonging to a client in the course of its MiFID business (see CASS 6.1.1R (1A)); or

    2. (b)

      is safeguarding and administering investments, in the course of business that is not MiFID business (see CASS 6.1.1R (1B)).

Personal investment firms

CASS 6.1.16C R

2The custody rules do not apply to a personal investment firm when it temporarily holds a designated investment, other than in bearer form, belonging to a client, if the firm:

  1. (1)

    keeps it secure, records it as belonging to that client, and forwards it to the client or in accordance with the client's instructions, as soon as practicable after receiving it;

  2. (2)

    retains the designated investment for no longer than the firm has taken reasonable steps to determine is necessary to check for errors and to receive the final document in connection with any series of transactions to which the documents relate; and

  3. (3)

    makes a record, which must then be retained for a period of 5 years after the record is made, of all the designated investments handled in accordance with (1) and (2) together with the details of the clients concerned and of any action the firm has taken.

CASS 6.1.16D G

2Administrative convenience alone should not lead a personal investment firm to rely on CASS 6.1.16C R. Personal investment firms should consider what is in the client's interest and not rely on CASS 6.1.16C R as a matter of course.

Trustees and depositaries (except depositaries of AIFs and UCITS)

CASS 6.1.16E R

2The specialist regime in CASS 6.1.16F R to CASS 6.1.16I G does not apply to a MiFID investment firm which holds financial instruments belonging to a client in the course of MiFID business.

CASS 6.1.16F R

2When a trustee firm or depositary acts as a custodian for a trust or collective investment scheme, (except for a firmacting as trustee or depositary of an AIF and a firmacting as trustee or depositary of a UCITS12), and:

7
  1. (1)

    the trust or scheme is established by written instrument; and

  2. (2)

    the trustee firm or depositary has taken reasonable steps to determine that the relevant law and provisions of the trust instrument or scheme constitution will provide protections at least equivalent to the custody rules for the trust property or scheme property;

the trustee firm or depositary need comply only with the custody rules listed in the table below.

Reference

Rule

CASS 6.1.1 R to CASS 6.1.9 G and CASS 6.1.15 G to CASS 6.1.16C R

Application

CASS 6.1.16E R to CASS 6.1.16I G

Trustees and depositaries

CASS 6.1.22 G to CASS 6.1.24 G

General purpose

CASS 6.2.1 R and CASS 6.2.2 R

Protection of clients' safe custody assets

CASS 6.2.3 R and CASS 6.2.3B G9

9

Registration and recording of legal title9

CASS 6.2.7 R

Holding9

9 CASS 6.3.1 R to CASS 6.3.4B G9

9

Depositing safe custody assets with third parties

CASS 6.4.1 R and CASS 6.4.2 G

Use of safe custody assets

CASS 6.6 9

9

Records, accounts and reconciliations

CASS 6.1.16G G

2The reasonable steps referred in CASS 6.1.16FR (2) could include obtaining an appropriate legal opinion to that effect.

CASS 6.1.16H R

[deleted]9

9
CASS 6.1.16I G

2A trustee firm or depositary that just arranges safeguarding and administration of assets may also take advantage of the exemption in CASS 6.1.16J R (Arrangers).

Depositaries of AIFs

CASS 6.1.16IA R
  1. (1)

    7Subject to (2), when a firm is acting as trustee or depositary of an AIF the firm need comply only with the custody rules in the table below:

    Reference

    Rule

    CASS 6.1.1 R, CASS 6.1.9 G, CASS 6.1.9A G and CASS 6.1.16IB G

    Application

    CASS 6.1.22 G to CASS 6.1.24 G

    General purpose

    CASS 6.2.3 R and CASS 6.2.3B G9 to CASS 6.2.6 G

    9

    Registration and recording of legal title9

    CASS 6.2.7 R

    Holding

    CASS 6.6.2 R, CASS 6.6.4 R, CASS 6.6.6 R, CASS 6.6.7 R, CASS 6.6.57R (2) and CASS 6.6.58 G9

    9

    Records, accounts and reconciliations

  2. (2)

    When a firm is acting as trustee or depositary of an AIF that is an authorised AIF the firm must, in addition to the custody rules in (1), also comply with the custody rules in the table below:

    Reference

    Rule

    CASS 6.1.1BR (2)10

    10

    Application

    CASS 6.6.8 R, CASS 6.6.11 R to CASS 6.6.32 G, CASS 6.6.41 G, CASS 6.6.43 G and CASS 6.6.47 G.9

    9

    Records, accounts and reconciliations

CASS 6.1.16IB G

7 Firms acting as trustee or depositary of an AIF are reminded of the obligations in FUND 3.11 (Depositaries) and Chapter IV (Depositary) of the AIFMD level 2 regulation which apply in addition to those in CASS 6.

CASS 6.1.16IC G

7A firm (Firm A) to which another firmacting as trustee or depositary of an AIF (Firm B) has delegated safekeeping functions in accordance9 with FUND 3.11.28 R9 (Delegation: safekeeping) will not itself be acting as trustee or depositary of an AIF for that AIF. CASS 6.1.16IA R will not apply to Firm A in respect of that AIF. However, Firm A may be safeguarding and administering investments in respect of that AIF.

9 9

Depositaries of UCITS

CASS 6.1.16ID R

12When a firm is acting as trustee or depositary of a UCITS, the firm need comply only with the custody rules in the table below:

Reference

Rule

CASS 6.1.1R , CASS 6.1.1BR(3), CASS 6.1.9G, CASS 6.1.16IEG

Application

CASS 6.1.22G to CASS 6.1.24G

General purpose

CASS 6.2.3R , CASS 6.2.3AR, CASS 6.2.3BG, CASS 6.2.7R

Holding of client assets

13 CASS 6.6.2R , CASS 6.6.4R, CASS 6.6.7R, CASS 6.6.41AG, CASS 6.6.57R(2A), CASS 6.6.58G

Records, accounts and reconciliations

CASS 6.1.16IE G

12 Firms acting as trustee or depositary of a UCITS are reminded of the obligations in COLL 6.6B (UCITS depositaries) which apply as well as those in CASS 6.

CASS 6.1.16IF G
  1. (1)

    12A firm (Firm A) to which another firmacting as trustee or depositary of a UCITS (Firm B) has delegated safekeeping functions under COLL 6.6B.25R (Delegation: safekeeping) will not itself be acting as trustee or depositary of a UCITS for that UCITS scheme.

  2. (2)

    CASS 6.1.16IDR will not apply to Firm A for that UCITS scheme.

  3. (3)

    However, Firm A may be safeguarding and administering investments in respect of that UCITS scheme.

Arrangers

CASS 6.1.16J R

2Only the custody rules in the table below apply to a firm when arranging safeguarding and administration of assets.

Reference

Rule

CASS 6.1.1 R to CASS 6.1.9 G and CASS 6.1.15 G to CASS 6.1.16B R

Application

CASS 6.1.16J R

Arrangers9

9 CASS 6.1.16K R

Records

CASS 6.1.22 G to CASS 6.1.24 G

General purpose9

9 CASS 6.3.4A R and CASS 6.3.4B G

Third-party custody agreements

CASS 6.1.16K R

2When a firmarranges safeguarding and administration of assets, it must ensure that proper records of the arrangements9 are made and retained for a period of 5 years after they are made.

9
CASS 6.1.17 R
  1. (1)

    [deleted]2

    2
  2. (1A)

    [deleted]2

    2
  3. (2)

    [deleted]2

    2
  4. (3)

    [deleted]2

    2
CASS 6.1.18 G

[deleted]2

2
CASS 6.1.19 G

[deleted]2

2
CASS 6.1.20 G

[deleted]2

2
CASS 6.1.20A G

[deleted]2

2
CASS 6.1.21 R

[deleted]2

2

General purpose

CASS 6.1.22 G

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 safe custody assets2 for which it is responsible.

2
CASS 6.1.23 G

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'ssafe custody assets2 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.

2
CASS 6.1.24 G

The custody rules also, where relevant,2 implement the provisions of MiFID which regulate the obligations of a firm when it holds financial instruments belonging to a client in the course of its MiFID business.2

CASS 6.2 Holding of client assets

Requirement to protect clients' safe custody assets2

CASS 6.2.1 R

1A firm must, when holding safe custody assets2 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 safe custody assets2 belonging to a client on the firm's own account except with the client's express consent.

[Note: article 13(7) of MiFID]

2 2

Requirement to have adequate organisational arrangements

CASS 6.2.2 R

A firm must introduce adequate organisational arrangements to minimise the risk of the loss or diminution of clients' safe custody assets,2 or the rights in connection with those safe custody assets,2 as a result of the misuse of the safe custody assets,2 fraud, poor administration, inadequate record-keeping or negligence.

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

2 2 2

Registration and recording of legal title2

CASS 6.2.3 R

Subject to CASS 6.2.3A-1R, a9firm must effect appropriate registration or recording of legal title to a safe custody asset2 belonging to a client8 in the name of:

6 2
  1. (1)

    the client, 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;

    6
  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

      5
    4. (d)

      a third party with whom financial instruments are deposited under CASS 6.3 (Depositing assets and arranging for assets to be deposited with third parties);3

  3. (3)

    any other third party, if the firm is not a trustee firm but is prevented from registering or recording legal title in the way set out in (1) or (2) and provided that:6

    6
    1. (a)

      the safe custody asset2 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
    2. (b)

      the firm has notified the client in writing;

  4. (4)

    the firm if either:6

    1. (a)

      it is not a trustee firm but is prevented from registering or recording legal title in the way set out in (1), (2) or (3) and provided that:6

      6
      1. (i)

        the safe custody asset 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; and6

      2. (ii)

        the firm has notified the client if a professional client, or obtained prior written consent if a retail client.6

    2. (b)

      it is a trustee firm and is prevented from registering or recording legal title in the way set out in (1) or (2).6

      6
CASS 6.2.3A-1 R

9A firm need not comply with CASS 6.2.3 R for any safe custody asset:

  1. (1)

    that it has deposited with a third party in accordance with CASS 6.3 (Depositing assets and arranging for assets to be deposited with third parties); and

  2. (2)

    for which, because of the arrangements with that third party for depositing the safe custody asset, it is not practicable for the firm to effect appropriate registration or recording of legal title itself.

CASS 6.2.3A R

4If:

  1. (1)

    the safe custody asset is an emission auction product that is a financial instrument; and

  2. (2)

    it is not practicable or possible for a firm to effect registration or recording of legal title in this asset in the manner set out in CASS 6.2.3 R,

the firm must register or record legal title in its name provided it has notified the client in writing.

CASS 6.2.3B G

6A firm, when complying with CASS 6.2.3R (3) or CASS 6.2.3R (4)(a), will be expected to demonstrate that adequate investigations have been made of the jurisdiction concerned by reference to local sources, which may include an appropriate legal opinion.

CASS 6.2.4 R

A firm must accept the same level of responsibility to its client for any nominee company controlled by the firm, or any nominee company controlled by an affiliated company of the firm,6 with respect of any requirements of the custody rules.

CASS 6.2.5 R

A firm may only6 register or record legal title to its own applicable asset6 in the same name as that in which legal title to a client's6safe custody asset2 is registered or recorded if the firm'sapplicable asset is separately identified from the client'ssafe custody asset in the firm's records, and either or both of the conditions in (1) and (2) are met.6

2 6 2
  1. (1)

    The firm's holding of its own applicable asset arises incidentally to:6

    6
    1. (a)

      designated investment business it carries on for the account of any client; or6

    2. (b)

      steps taken by the firm to comply with an applicable custody rule;6

    and, in the case of either (a) or (b), the situation where registration or recording of legal title of the firm'sapplicable asset is in the same name as the client'ssafe custody asset under this rule remains in place only to the extent that it is reasonably necessary.6

  2. (2)

    The registration or recording of legal title of the firm's own applicable asset in the same name as the client'ssafe custody asset is only as a result of the law or market practice of a jurisdiction outside of the United Kingdom.6

    6
CASS 6.2.6 G
6
  1. (1)

    Consistent with a firm's requirements to protect clients'safe custody assets and have adequate organisation arrangements in place (CASS 6.2.1 R and CASS 6.2.2 R), before a firm registers or records legal title to its own applicable asset in the same name as that in which legal title to a client'ssafe custody asset is registered or recorded under CASS 6.2.5 R, it should consider whether there are any means to avoid doing so.

  2. (2)

    Examples of where the conditions under CASS 6.2.5R (1) might be met include in the course of a firm:

    1. (a)

      correcting a dealing error that relates to a transaction for the account of a client; or

    2. (b)

      maintaining a small balance of the firm's own applicable assets for purely operational or compliance purposes (eg, as a float to cover potential custody shortfalls) in an amount that is proportionate to the total amount of safe custody assets held for clients; or

    3. (c)

      allocating safe custody assets to clients following settlement of a bulk order; or

    4. (d)

      facilitating a client transaction that involves fractional entitlements; or

    5. (e)

      making good a shortfall.6

CASS 6.2.7 R

A firm must ensure that any documents of title to applicable assets2 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 assets2 in bearer form.

2 2

Allocated but unclaimed safe custody assets6

CASS 6.2.8 G

6The purpose of CASS 6.2.10 R is to set out the requirements a firm must comply with if it chooses to divest itself of a client's unclaimed safe custody assets.

CASS 6.2.9 G

6Before acting in accordance with CASS 6.2.10 R to CASS 6.2.16 G, a firm should consider whether its actions are permitted by law and consistent with the arrangements under which the safe custody assets are held. These provisions relate to a firm's obligations as an authorised person.

CASS 6.2.10 R

6A firm may either (i) liquidate an unclaimed safe custody asset it holds for a client, at market value, and pay away the proceeds or (ii) pay away an unclaimed safe custody asset it holds for a client, in either case, to a registered charity of its choice provided:

  1. (1)

    this is permitted by law and consistent with the arrangements under which that safe custody asset is held;

  2. (2)

    it has held that safe custody asset for at least 12 years;

  3. (3)

    in the 12 years preceding the divestment of that safe custody asset, it has not received instructions relating to any safe custody assets from or on behalf of the client concerned;

  4. (4)

    it can demonstrate that it has taken reasonable steps to trace the client concerned and return that safe custody asset; and

  5. (5)

    the firm complies with CASS 6.2.14 R: the undertaking requirement.

CASS 6.2.11 E
  1. (1)

    6Taking reasonable steps in CASS 6.2.10R (4) includes following this course of conduct:

    1. (a)

      determining, as far as reasonably possible, the correct contact details for the relevant client;

    2. (b)

      writing to the client at the last known address either by post or by electronic mail to inform it:

      1. (i)

        of the name of the firm with which the client first deposited the safe custody asset in question;

      2. (ii)

        of the firm's intention to pay the safe custody asset to charity under CASS 6.2.10 R if it does not receive instructions from the client within 28 days;

    3. (c)

      where the client has not responded after the 28 days referred to in (b) attempting to communicate the information set out in (b) to the client on at least one further occasion by any means other than that used in (b) including by post, electronic mail, telephone or media advertisement;

    4. (d)

      subject to (e) and (f), where the client has not responded within 28 days following the most recent communication, writing again to the client at the last known address either by post or by electronic mail to inform them that:

      1. (i)

        as the firm received no instructions from the client, it will in 28 days pay the safe custody asset to charity under CASS 6.2.10 R; and

      2. (ii)

        an undertaking will be provided by the firm or a member of its group to pay to the client concerned a sum equal to the value of the safe custody asset at the time it was liquidated or paid away in the event of the client seeking to claim the safe custody asset in future;

    5. (e)

      if the firm has carried out the steps in (b) or (c) and in response has received positive confirmation in writing that the client is no longer at a particular address, the firm should not use that address for the purposes of (d);

    6. (f)

      if, after carrying out the steps in (a), (b) and (c), the firm has obtained positive confirmation that none of the contact details it holds for the relevant client are accurate or, if utilised, the communication is unlikely to reach the client, the firm does not have to comply with (d); and

    7. (g)

      waiting a further 28 days following the most recent communication under this rule before divesting itself of the safe custody asset under CASS 6.2.10 R.

  2. (2)

    Compliance with (1) may be relied on as tending to establish compliance with CASS 6.2.10R (4).

  3. (3)

    Contravention of (1) may be relied on as tending to establish contravention of CASS 6.2.10R (4).

CASS 6.2.12 G

6For the purpose of CASS 6.2.11E (1)(a), a firm may use any available means to determine the correct contact details for the relevant client, including telephoning the client, searching internal records, media advertising, searching public records, mortality screening, using credit reference agencies or tracing agents.

CASS 6.2.13 R

6Where a firm liquidates a safe custody asset under CASS 6.2.10 R, it must pay away the proceeds to charity as soon as practicable.

CASS 6.2.14 R

6Where a firm divests itself of a client'ssafe custody asset under CASS 6.2.10 R, it must comply with either (1)(a) or (1)(b) and, in either case, (2).

  1. (1)
    1. (a)

      The firm must unconditionally undertake to pay to the client concerned a sum equal to the value of the safe custody asset at the time it was liquidated or paid away in the event of the client seeking to claim the safe custody asset in future.

    2. (b)

      The firm must ensure that an unconditional undertaking in the terms set out in (1)(a)7 is made by a member of its group and there is suitable information available for relevant clients to identify the member of the group granting the undertaking.

  2. (2)

    Any undertaking under this rule must be:

    1. (a)

      authorised by the firm'sgoverning body where (1)(a)7 applies or the governing body of the group member where (1)(b)7 applies;

    2. (b)

      legally enforceable by any person that had a legally enforceable claim to the unclaimed safe custody asset in question at the time it was divested by the firm, or by an assign or successor in title to such claim; and

    3. (c)

      retained by the firm, and, where (1)(b)7 applies, by the group member, indefinitely.

CASS 6.2.15 R
  1. (1)

    6If a firm pays away a client's unclaimed safe custody assets to charity or liquidates a client's unclaimed safe custody assets and pays the proceeds to charity under CASS 6.2.10 R it must make and retain, or where the firm already has such records, retain:

    1. (a)

      records of all safe custody assets divested under CASS 6.2.10 R (including details of the value of each asset at that time and the identity of the client to whom the asset was allocated);

    2. (b)

      all relevant documentation (including charity receipts); and

    3. (c)

      details of the communications the firm had or attempted to make with the client concerned pursuant to CASS 6.2.10R (4).

  2. (2)

    Records in (1) must be retained indefinitely.

  3. (3)

    If a member of the firm'sgroup has provided an undertaking under CASS 6.2.14R (1)(b) then the records in (1) must be readily accessible to that group member.

Costs associated with divesting allocated but unclaimed client assets

CASS 6.2.16 G

6Any costs associated with the firm divesting itself of safe custody assets pursuant to CASS 6.2.10 R to CASS 6.2.15 R should be paid for from the firm's own funds, including:

  1. (1)

    any costs associated with the firm carrying out the steps in CASS 6.2.10R (4) or CASS 6.2.11 E; and

  2. (2)

    the cost of any insurance purchased by a firm or the relevant member of its group to cover any legally enforceable claim in respect of the assets divested under CASS 6.2.10 R.

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

Depositing safe custody assets with third parties6

CASS 6.3.1 R
  1. (1)

    1A firm may deposit safe custody assets2 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 assets2 that could adversely affect clients' rights.

      2
  5. (4)

    [deleted]6

    6

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

CASS 6.3.2 G

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 6.3.2A R
  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 6.3.3 G

[deleted]6

CASS 6.3.4 R
  1. (1)

    Subject to (2), a6firm must only deposit safe custody assets2 with a third party in a jurisdiction which specifically regulates and supervises the safekeeping of safe custody assets2 for the account of another person with a third party who is subject to such regulation.

    622
  2. (2)

    A firm must not deposit safe custody assets2 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 assets2 for the account of another person unless:

    22
    1. (a)

      the nature of the safe custody assets2 or of the investment services connected with those safe custody assets2 requires them to be deposited with a third party in that third country; or

      22
    2. (b)

      the safe custody assets2 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-1 R

6A firm must take the necessary steps to ensure that any client'ssafe 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 6.3.4A R

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 6.3.4B G

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'sclient 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'sclient'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'sclient; 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 6.3.5 R

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

5 5
CASS 6.3.6 R

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:

5 5 5
  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

    55
  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 6.3.7 G

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'ssafe 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 6.3.8 R

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 6.3.9 R

5 CASS 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

CASS 6.4 Use of safe custody assets2

CASS 6.4.1 R
  1. (1)

    1A firm must not enter into arrangements for securities financing transactions in respect of safe custody assets2 held by it on behalf of a client or otherwise use such safe custody assets2 for its own account or the account of another client of the firm, unless:

    22
    1. (a)

      the client has given express prior consent to the use of the safe custody assets2 on specified terms; and

      2
    2. (b)

      the use of that client'ssafe custody assets2 is restricted to the specified terms to which the client consents.

      2
  2. (2)

    A firm must not enter into arrangements for securities financing transactions in respect of safe custody assets2 held by it on behalf of a client in an omnibus account held by a third party, or otherwise use safe custody assets2 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):

    22
    1. (a)

      each client whose safe custody assets2 are held together in an omnibus account has given express prior consent in accordance with (1)(a); or

      2
    2. (b)

      the firm has in place systems and controls which ensure that only safe custody assets2 belonging to clients who have given express prior consent in accordance with the requirements of (1)(a) are used.

      2
  3. (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.

  4. (4)

    [deleted]4

    4

[Note: article 19 of the MiFID implementing Directive]

CASS 6.4.1A G

5The FCA expects firms which enter into arrangements under CASS 6.4.1 R with retail clients to only enter into securities financing transactions and not otherwise use retail client'ssafe custody assets.

CASS 6.4.2 G

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. For any transactions involving retail clients carried out under this section the FCA expects that:5

5
  1. (1)

    the firm ensures that relevant collateral is provided by the borrower in favour of the client;

  2. (2)

    the current realisable value of the safe custody asset2 and of the relevant collateral is monitored daily; and

    2
  3. (3)

    the firm provides relevant collateral to make up the difference where the current realisable value of the collateral falls below that of the safe custody asset2 , unless otherwise agreed in writing by the client.

    2
CASS 6.4.3 R

Where a firm uses safe custody assets2 as permitted in this section, the records of the firm must include details of the client on whose instructions the use of the safe custody assets2 has been effected, as well as the number of safe custody assets2 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]

2 2 2

CASS 6.6 Records, accounts and reconciliations

1Records and accounts

CASS 6.6.1 G

This section sets out the requirements a firm must meet when keeping records and accounts of the safe custody assets it holds for clients.

CASS 6.6.2 R

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

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

CASS 6.6.3 R

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

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

CASS 6.6.4 R
CASS 6.6.5 G

The requirements in CASS 6.6.2 R to CASS 6.6.4 R are for a firm to keep internal records and accounts of clients'safe custody assets. Therefore any records falling under those requirements should be maintained by the firm, and should be separate to any records the firm may have obtained from any third parties, such as those with whom it may have deposited, or through whom it may have registered legal title to, clients'safe custody assets.

Right to use agreements

CASS 6.6.6 R

A firm must keep a copy of every executed client agreement that includes that firm's right to use safe custody assets for its own account (see CASS 6.4.1 R), including in the case of a prime brokerage agreement the disclosure annex referred to in CASS 9.3.1 R.

General record-keeping

CASS 6.6.7 R

Unless otherwise stated, a firm must ensure that any record made under the custody rules is retained for a period of five years starting from the later of:

  1. (1)

    the date it was created; and

  2. (2)

    (if it has been modified since the date it was created), the date it was most recently modified.

CASS 6.6.8 R

For each internal custody record check, each physical asset reconciliation and each external custody reconciliation carried out by a firm, it must make a record including:

  1. (1)

    the date it carried out the relevant process;

  2. (2)

    the actions the firm took in carrying out the relevant process; and

  3. (3)

    a list of any discrepancies the firm identified and the actions the firm took to resolve those discrepancies.

Policies and procedures

CASS 6.6.9 G

Firms are reminded that they must, under SYSC 6.1.1 R, establish, implement and maintain adequate policies and procedures sufficient to ensure compliance of the firm with the rules in this chapter. This should include, for example, establishing and maintaining policies and procedures concerning:

  1. (1)

    the frequency and method of the checks and reconciliations the firm is required to carry out under this section;

  2. (2)

    the frequency with which the firm is required to review its arrangements in compliance with this chapter; and

  3. (3)

    the resolution of discrepancies and the treatment of shortfalls under this section.

Internal custody record checks

CASS 6.6.10 G
  1. (1)

    An internal custody record check is one of the steps a firm takes to satisfy its obligations under:

    1. (a)

      Principle 10 (Clients' assets);

    2. (b)

      CASS 6.2.2 R (Requirement to have adequate organisational arrangements);

    3. (c)

      CASS 6.6.2 R to CASS 6.6.4 R (Records and accounts); and

    4. (d)

      where relevant, SYSC 4.1.1 R (General requirements) and SYSC 6.1.1 R (Compliance).

  2. (2)

    An internal custody record check is a check as to whether the firm's records and accounts of the safe custody assets held by the firm (including, for example, those deposited with third parties under CASS 6.3 (Depositing safe custody assets with third parties)) correspond with the firm's obligations to its clients to hold those safe custody assets.

CASS 6.6.11 R
  1. (1)

    A firm must perform an internal custody record check:

    1. (a)

      subject to (2), as regularly as is necessary but without allowing more than one month to pass between each internal custody record check; and

    2. (b)

      as soon as reasonably practicable after the date to which the internal custody record check relates.

  2. (2)

    A firm that holds no safe custody assets other than physical safe custody assets must perform an internal custody record check as regularly as necessary but, in any case, no less often than its physical asset reconciliations under CASS 6.6.22 R.

CASS 6.6.12 G

CASS 6.6.44 R sets out the matters which a firm must have regard to when determining the frequency at which to undertake an internal custody record check.

CASS 6.6.13 R

A firm must perform an internal custody record check using either the internal custody reconciliation method or the internal system evaluation method. It must not use a combination of these methods.

CASS 6.6.14 R

A firm must only use its internal records (for example its depot and client-specific ledgers for safe custody assets or other internal accounting records) in order to perform an internal custody record check.

CASS 6.6.15 G

CASS 6.6.14 R means that a firm must not base its internal custody record checks on any records that the firm may have obtained from any third parties, such as those with whom it may have deposited, or through whom it may have registered legal title to, clients'safe custody assets.

The internal custody reconciliation method for internal custody record checks

CASS 6.6.16 R
CASS 6.6.17 R

The internal system evaluation method for internal custody record checks

CASS 6.6.18 G
  1. (1)

    The internal system evaluation method is available to any firm, including one that is not able to use the internal custody reconciliation method because it does not meet the requirements at CASS 6.6.16R (1) and CASS 6.6.16R (2).

  2. (2)

    The purpose of the internal system evaluation method is to detect weaknesses in a firm's systems and controls and any recordkeeping discrepancies. However, this method is not designed to substitute a firm's other measures for ensuring compliance with the custody rules, such as monitoring the accuracy of its records (see also CASS 6.2.2 R and CASS 6.6.3 R).

CASS 6.6.19 R

The internal system evaluation method requires a firm to:

  1. (1)

    establish a process that evaluates:

    1. (a)

      the completeness and accuracy of the firm's internal records and accounts of safe custody assets held by the firm for clients, in particular whether sufficient information is being completely and accurately recorded by the firm to enable it to:

      1. (i)

        comply with CASS 6.6.4 R; and

      2. (ii)

        readily determine the total of all the safe custody assets that the firm holds for its clients; and

    2. (b)

      whether the firm's systems and controls correctly identify and resolve all discrepancies in its internal records and accounts of safe custody assets held by the firm for clients;

  2. (2)

    run the evaluation process established under (1) on the date of each internal custody record check; and

  3. (3)

    promptly investigate and, without undue delay, resolve any causes of discrepancies that the evaluation process reveals.

CASS 6.6.20 G

The evaluation process under CASS 6.6.19R (1) should verify that the firm's systems and controls correctly identify and resolve at least the following types or causes of discrepancies:

  1. (1)

    items in the firm's records and accounts that might be erroneously overstating or understating the safe custody assets held by a firm (for example, 'test' entries and 'balancing' entries);

  2. (2)

    negative balances;

  3. (3)

    processing errors;

  4. (4)

    journal entry errors (eg, omissions and unauthorised system entries); and

  5. (5)

    IT errors (eg, software issues that could lead to inaccurate records).

Physical asset reconciliations

CASS 6.6.21 G
  1. (1)

    A physical asset reconciliation is a separate process to the internal custody record check. Firms that hold physical safe custody assets for clients are required to perform both processes.

  2. (2)

    The purpose of a physical asset reconciliation is to check that a firm's internal records and accounts of the physical safe custody assets kept by the firm for clients are accurate and complete, and to ensure any discrepancies are investigated and resolved.

CASS 6.6.22 R

A firm that holds physical safe custody assets must perform a physical asset reconciliation for all the physical safe custody assets it holds for clients:

  1. (1)

    as regularly as is necessary but without allowing more than six months to pass between each physical asset reconciliation; and

  2. (2)

    as soon as reasonably practicable after the date to which the physical asset reconciliation relates.

CASS 6.6.23 G

CASS 6.6.44 R sets out the matters which a firm must have regard to when determining the frequency at which to undertake a physical asset reconciliation.

CASS 6.6.24 R

When performing a physical asset reconciliation a firm must:

  1. (1)

    count all the physical safe custody assets held by the firm for clients as at the date to which the physical asset reconciliation relates; and

  2. (2)

    compare the count in (1) against what the firm's internal records and accounts state as being in the firm's possession as at the same date.

CASS 6.6.25 R
CASS 6.6.26 G

Regardless of the method used, a firm should ensure that all safe custody assets held by the firm as physical safe custody assets for clients are subject to a physical asset reconciliation at the frequency required under CASS 6.6.22 R.

CASS 6.6.27 R

If a firm completes a physical asset reconciliation in a single stage, such that the firm:

  1. (1)

    performs a single count under CASS 6.6.24R (1) which encompasses all the physical safe custody assets held by the firm for clients as at the date to which the physical asset reconciliation relates; and

  2. (2)

    compares that count against the firm's internal records and accounts in accordance with CASS 6.6.24R (2);

then the firm will have used the total count method for that physical asset reconciliation.

CASS 6.6.28 R

If a firm completes a physical asset reconciliation in two or more stages, such that the firm:

  1. (1)

    performs two or more counts under CASS 6.6.24R (1) (each on a separate occasion and relating to a different stock line or group of stock lines forming part of the firm's overall holdings of physical safe custody assets) which, once all of the counts are complete, encompass all the physical safe custody assets held by the firm for clients; and

  2. (2)

    compares each of those counts against the firm's internal records and accounts in accordance with CASS 6.6.24R (2);

then the firm will have used the rolling stock method for that physical asset reconciliation.

CASS 6.6.29 G
  1. (1)

    The rolling stock method allows a firm to perform its physical asset reconciliation in several stages, with each stage referring to a line of stock or group of stock lines in a designated investment selected by a firm (for example, all the shares with an issuer whose name begins with the letter 'A' or all the stock lines held in connection with a particular business line).

  2. (2)

    Where a firm uses the rolling stock method to perform a physical asset reconciliation, all the stages in that physical asset reconciliation must be completed in time to ensure the firm complies with CASS 6.6.22 R.

CASS 6.6.30 R
  1. (1)

    If a firm wishes to use the rolling stock method to perform a physical asset reconciliation it must first establish and document in writing its reasons for concluding that the way in which it will carry out its physical asset reconciliations is adequately designed to mitigate the risk of the firm's records being manipulated or falsified.

  2. (2)

    A firm must retain any documents created under (1) for a period of at least five years after the date it ceases to use the rolling stock method to perform its physical asset reconciliation.

CASS 6.6.31 G

The documents under CASS 6.6.30R (1) should, for example, cover the systems and controls the firm will have in place to mitigate the risk of 'teeming and lading' in respect of all the physical safe custody assets held by the firm for clients and across all the firm's business lines.

CASS 6.6.32 G

To meet the requirement to have adequate organisational arrangements under CASS 6.2.2 R, a firm should consider performing 'spot checks' as to whether title to an appropriate sample of physical safe custody assets that it holds is registered correctly under CASS 6.2.3 R (Registration and recording of legal title).

External custody reconciliations

CASS 6.6.33 G

The purpose of an external custody reconciliation is to ensure the completeness and accuracy of a firm's internal records and accounts of safe custody assets held by the firm for clients against those of relevant third parties.

CASS 6.6.34 R

A firm must conduct, on a regular basis, reconciliations between its internal records and accounts of safe custody assets held by the firm for clients and those of any third parties by whom those safe custody assets are held.

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

CASS 6.6.35 R

In CASS 6.6.34 R, the third parties whose records and accounts a firm is required to reconcile its own internal records and accounts with must include:

  1. (1)

    the third parties with which the firm has deposited clients'safe custody assets;

    3
  2. (2)

    where the firm has not deposited a client'ssafe custody asset with a third party:

    3
    1. (a)

      the third parties responsible for the registration of legal title to that safe custody asset; or3

      3
    2. (b)

      a person acting as an operator for the purposes of any of the relevant overseas USRs if:3

      1. (i)

        the safe custody asset is an uncertificated unit of a security governed by any of the relevant overseas USRs; and3

      2. (ii)

        the firm has reasonable grounds to be satisfied that the records of that person take into account all instructions issued by that person which require an issuer to register on a register of securities a transfer of title to any uncertificated units.3

CASS 6.6.36 G

Examples of the sorts of third parties referred to at CASS 6.6.35R (2)(a)3 include central securities depositaries, operators of collective investment schemes, and administrators of offshore funds.

3
CASS 6.6.37 R

A firm must conduct external custody reconciliations:

  1. (1)

    as regularly as necessary but allowing2 no more than one month to pass2 between each external custody reconciliation; and

  2. (2)

    as soon as reasonably practicable after the date to which the external custody reconciliation relates.

CASS 6.6.38 G

CASS 6.6.44 R sets out the matters which a firm must consider when determining the frequency at which to undertake an external custody reconciliation.

CASS 6.6.39 G

Where a firm holds clients'safe custody assets electronically with a central securities depositary which is able to provide adequate information to the firm on its holdings on a daily basis, it is best practice under CASS 6.6.37R (1) for the firm to conduct an external custody reconciliation each business day in respect of those assets.

CASS 6.6.40 G

Where a firm deposits safe custody assets belonging to a client with a third party or where a third party is responsible for the registration of legal title to that asset,2 in complying with the requirements of CASS 6.6.34 R, the firm should seek to ensure that the third party provides the firm with adequate information (for example in the form of a statement) as at a date specified by the firm which details the description and amounts of all the safe custody assets credited to the relevant account(s) and that this information is provided in sufficient time to allow the firm to carry out its external custody reconciliations under CASS 6.6.37 R.

CASS 6.6.41 G

If a firmacting as trustee or depositary of an AIF that is an authorised AIF deposits safe custody assets belonging to a client with a third party, under article 89(1)(c) (Safekeeping duties with regard to assets held in custody) of the AIFMD level 2 regulation, the firm should seek to ensure that the third party provides the firm with adequate information (for example in the form of a statement) as at a date or dates specified by the firm which details the description and amounts of all the safe custody assets credited to the account(s) and that this information is provided in adequate time to allow the firm to carry out the periodic reconciliations required under article 89(1)(c) (Safekeeping duties with regard to assets held in custody) of the AIFMD level 2 regulation.

CASS 6.6.41A G

5If a firmacting as trustee or depositary of a UCITS deposits safe custody assets belonging to a client with a third party, under article 13(1)(c) (Safekeeping duties with regard to assets held in custody) of the UCITS level 2 regulation, the firm should seek to ensure that:

  1. (1)

    the third party provides the firm with adequate information (for example in the form of a statement):

    1. (a)

      as at a date or dates specified by the firm; and

    2. (b)

      which details the description and amounts of all the safe custody assets credited to the account(s); and

  2. (2)

    such information is provided in adequate time to allow the firm to carry out the periodic reconciliations required under article 13(1)(c) of the UCITS level 2 regulation.

CASS 6.6.42 G

External custody reconciliations must be performed for each safe custody asset held by the firm for its clients, except for physical safe custody assets. A reconciliation of transactions involving safe custody assets, rather than of the safe custody assets themselves, will not satisfy the requirement under CASS 6.6.34 R.

CASS 6.6.43 G

A firmacting as trustee or depositary of an AIF that is an authorised AIF should perform the reconciliation under article 89(1)(c) (Safekeeping duties with regard to assets held in custody) of the AIFMD level 2 regulation:

  1. (1)

    as regularly as is necessary having regard to the frequency, number and value of transactions which the firm undertakes in respect of safe custody assets, but with no more than one month between each reconciliation; and

  2. (2)

    as soon as reasonably practicable after the date to which the reconciliation relates;

to ensure the accuracy of its internal records and accounts against those of third parties by whom client'ssafe custody assets are held.

Frequency of checks and reconciliations under this section

CASS 6.6.44 R

When determining the frequency at which it will undertake its internal custody record checks under CASS 6.6.11 R, physical asset reconciliations under CASS 6.6.22 R, and external custody reconciliations under CASS 6.6.37 R, a firm must have regard to:

  1. (1)

    the frequency, number and value of transactions which the firm undertakes in respect of clients'safe custody assets; and

  2. (2)

    the risks to which clients'safe custody assets are exposed, such as the nature, volume and complexity of the firm's business and where and with whom safe custody assets are held.

CASS 6.6.45 R
  1. (1)

    A firm must make and retain records sufficient to show and explain any decision it has taken under CASS 6.6.44 R when determining the frequency of its internal custody record checks, physical asset reconciliations and external custody reconciliations. Subject to (2), such records must be retained indefinitely.

  2. (2)

    If any decision under CASS 6.6.44 R is superseded by a subsequent decision under that rule then the record of that earlier decision retained in accordance with (1) need only be retained for a further period of five years from the subsequent decision.

CASS 6.6.46 R
  1. (1)

    Subject to (3), a firm must review the frequency at which it conducts internal custody record checks, physical asset reconciliations and external custody reconciliations at least annually to ensure that it continues to comply with CASS 6.6.11 R, CASS 6.6.22 R and CASS 6.6.37 R, respectively, and has given due consideration to the matters in CASS 6.6.44 R.

  2. (2)

    For each review a firm undertakes under (1), it must record the date and the actions it took in reviewing the frequency of its internal custody record checks, physical asset reconciliations and external custody reconciliations.

  3. (3)

    A firm need not carry out a review under (1) in respect of its internal custody record checks, physical asset reconciliations and external custody reconciliations, if it already conducts the particular process in respect of all relevant safe custody assets each business day.

Independence of person performing checks and reconciliations

CASS 6.6.47 G

Whenever possible, a firm should ensure that checks and 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 checked and/or reconciled.

Resolution of discrepancies

CASS 6.6.48 G

In this section, a discrepancy should not be considered to be resolved until it is fully investigated and corrected, and any associated shortfall is made good by way of the firm ensuring that:

  1. (1)

    it is holding (under the custody rules) each of the safe custody assets that the firm ought to be holding for each of its clients; and

  2. (2)

    its own records, and the records of any relevant other person (such as a third party with whom the firm deposited the safe custody assets) accurately correspond to the position under (1).

CASS 6.6.49 R

When a firm identifies a discrepancy as a result of carrying out an internal custody record check, physical asset reconciliation or external custody reconciliation, the firm must:2

  1. (1)

    promptly investigate the reason for the discrepancy and resolve it without undue delay; and2

  2. (2)

    take appropriate steps under CASS 6.6.54 R for the treatment of any shortfalls until that discrepancy is resolved.2

CASS 6.6.50 R

When a firm identifies a discrepancy outside of its processes for an internal custody record check, physical asset reconciliation or external custody reconciliation, the firm must:2

  1. (1)

    take all reasonable steps both to investigate the reason for the discrepancy and to resolve it; and2

  2. (2)

    take appropriate steps under CASS 6.6.54 R for the treatment of shortfalls until that discrepancy is resolved.2

CASS 6.6.51 G

Where the discrepancy identified under CASS 6.6.49 R or CASS 6.6.50 R has arisen as a result of a breach of thecustody rules, the firm should ensure it takes sufficient steps to avoid a reoccurrence of that breach (see Principle 10 (Clients' assets), CASS 6.6.3 R and, as applicable, SYSC 4.1.1R (1) and SYSC 6.1.1 R).

CASS 6.6.52 G

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

CASS 6.6.53 G

Items recorded in a firm's records and accounts that are no longer recorded by relevant third parties (such as 'liquidated stocks') also fall within the scope of discrepancies in this section.

Treatment of shortfalls

CASS 6.6.54 R
  1. (1)

    This rule applies where a firm identifies a discrepancy as a result of, or that reveals, a shortfall, which the firm has not yet resolved.

  2. (2)

    Subject to (3), until the discrepancy is resolved a firm must do one of the following:

    1. (a)

      appropriate a sufficient number of its own applicable assets to cover the value of the shortfall and hold them for the relevant clients under the custody rules in such a way that the applicable assets, or the proceeds of their liquidation, will be available for distribution for the benefit of the relevant clients in the event of the firm'sfailure and, in doing so:

      1. (i)

        ensure that the applicable assets are clearly identifiable as separate from the firm's own property and are recorded by the firm in its client-specific safe custody asset record as being held for the relevant client;

      2. (ii)

        keep a record of the actions the firm has taken under this rule which includes a description of the shortfall, identifies the relevant affected clients, and lists the applicable assets that the firm has appropriated to cover the shortfall; and

      3. (iii)

        update the record made under (ii) whenever the discrepancy is resolved and the firm has re-appropriated the applicable assets; or

    2. (b)

      (provided that doing so is consistent with the firm'spermissions and would result in money being held for the relevant client) in respect of the shortfall under CASS 7.17.2 R2 (statutory trust) appropriate a sufficient amount of its own money to cover the value of the shortfall, hold it for the relevant client as client money under the client money rules and, in doing so:

      1. (i)

        ensure the money is segregated under CASS 7.13 (Segregation of client money) and recorded as being held for the relevant client under CASS 7.15 (Records, accounts and reconciliations);

      2. (ii)

        keep a record of the actions the firm has taken under this rule which includes a description of the shortfall, identifies the relevant affected clients, and specifies the amount of money that the firm has appropriated to cover the shortfall; and

      3. (iii)

        update the record made under (ii) whenever the discrepancy is resolved and the firm has re-appropriated the money; or

    3. (c)

      appropriate a number of applicable assets in accordance with (a) and an amount of money in accordance with (b) which, in aggregate, are sufficient to cover the value of the shortfall.

  3. (3)

    If the firm, where justified, concludes that another person is responsible for the discrepancy,2 regardless of any dispute with that other person, or that2 the discrepancy is due to a timing difference between the accounting systems of that other person and that of the firm, the firm must take all reasonable steps to resolve the situation without undue delay with the other person. Until the discrepancy is resolved the firm must consider whether it would be appropriate to notify the affected client of the situation, and may take steps under (2) for the treatment of shortfalls until that discrepancy is resolved.

CASS 6.6.55 G

In considering whether it should notify affected clients under CASS 6.6.54R (3), a firm should have regard to its obligations under the client's best interests rule to act honestly, fairly and professionally in accordance with the best interests of its clients, and to Principle 7 (communications with clients).

CASS 6.6.56 G
  1. (1)

    The value of a shortfall for the purposes of CASS 6.6.54 R may be determined by the previous day's closing mark to market valuation, or if in relation to a particular safe custody asset none is available, the most recently available valuation.

  2. (2)

    Where a firm is taking the measures under CASS 6.6.54R (2) in respect of a particular shortfall it should, as regularly as necessary, and having regard to Principle 10:

    1. (a)

      review the value of the shortfall in line with (1); and

    2. (b)

      where the firm has found that the value of the shortfall has changed, adjust either or both the number of own applicable assets or the amount of money it has appropriated to ensure that in aggregate the assets and monies set aside are sufficient to cover the changed value of the shortfall.

Notification requirements

CASS 6.6.57 R

A firm must inform the FCA in writing without delay if:

  1. (1)

    its internal records and accounts of the safe custody assets held by the firm for clients are materially out of date, or materially inaccurate or invalid, so that the firm is no longer able to comply with the requirements in CASS 6.6.2 R to CASS 6.6.4 R; or

  2. (2)

    5it is a firmacting as trustee or depositary of an AIF and has not complied with, or is materially unable to comply with, the requirements in CASS 6.6.2 R or in article 89(1)(b) or 89(1)(c) (Safekeeping duties with regard to assets held in custody) of the AIFMD level 2 regulation; or

  3. (2A)

    5it is a firmacting as trustee or depositary of a UCITS and has not complied with, or is materially unable to comply with, the requirements in:

    1. (a)

      5CASS 6.6.2R; or

    2. (b)

      5article 13(1)(b) or 13(1)(c) (Safekeeping duties with regard to assets held in custody) of the UCITS level 2 regulation; or

  4. (3)

    it will be unable, or materially fails, to take the steps required under CASS 6.6.54 R for the treatment of shortfalls; or

  5. (4)

    it will be unable, or materially fails, to conduct an internal custody record check in compliance with CASS 6.6.11 R to CASS 6.6.19 R; or

  6. (5)

    it will be unable, or materially fails, to conduct a physical asset reconciliation in compliance with CASS 6.6.22 R4 to CASS 6.6.30 R; or

  7. (6)

    it will be unable, or materially fails, to conduct an external custody reconciliation in compliance with CASS 6.6.34 R to CASS 6.6.37 R.

Annual audit of compliance with the custody rules

CASS 6.6.58 G

Firms are reminded that the auditor of the firm has to confirm in the report submitted to the FCA 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 custody rules.