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CASS 7.16 The standard methods of internal client money reconciliation

CASS 7.16.1G
  1. (1)

    Firms are required to carry out an internal client money reconciliation each business day (CASS 7.15.12 R and CASS 7.15.15R(1)) or as required by CASS 7.15.15R(4) after a primary pooling event3. This section sets out methods of reconciliation that are appropriate for these purposes (the standard methods of internal client money reconciliation).

  2. (2)

    Where a firm establishes one or more sub-pools, the provisions of CASS 7.16 (The standard methods of internal client money reconciliation) shall be read as applying to the firm's general pool and each sub-pool individually, in line with CASS 7.19.3 R and CASS 7.19.4 R.

CASS 7.16.2G
  1. (1)

    A non-standard method of internal client money reconciliation is a method of internal client money reconciliation which does not meet the requirements of this section.

  2. (2)

    Where a firm uses a non-standard method of internal client money reconciliation it is reminded that it must comply with the requirements in CASS 7.15.18 R.

CASS 7.16.3G

Regardless of whether a firm is following one of the standard methods of internal client money reconciliation or a non-standard method of internal client money reconciliation, it is reminded that it must maintain its records so that it is able to promptly calculate the total amount of client money it should be holding for each client (see CASS 7.15.15 R (1)).

CASS 7.16.4G

Firms are reminded that the internal client money reconciliation should achieve the purposes set out in CASS 7.15.14 G.

CASS 7.16.5G
  1. (1)

    A firm that adopts the normal approach to segregating client money (CASS 7.13.6 R) will be using the methods in this section to check whether it has correctly segregated client money in its client bank accounts.

  2. (2)

    A firm that adopts the alternative approach to segregating client money (CASS 7.13.54 G) will be using the methods in this section to calculate how much money it needs to withdraw from, or place in, client bank accounts as a result of any discrepancy arising between its client money requirement and its client money resource at the close of business on the previous business day.

CASS 7.16.6G

Unless otherwise stated, firms are reminded that they are required to receive all client money receipts directly into a client bank account (see CASS 7.13.6 R).

CASS 7.16.7G

A firm that receives client money in the form of cash, a cheque or other payable order is reminded that it must pay that money (eg, into a client bank account) no later than on the business day after it receives the money (see CASS 7.13.32 R). Once deposited into a client bank account, that receipt of client money should form part of the firm's client money resource (see CASS 7.16.8 R). In calculating its client money requirement, a firm will need to take into account any client money received as cash, cheques or payment orders but not yet deposited into a client bank account (see CASS 7.16.25 R (3) and CASS 7.16.26 G).

Client money resource

CASS 7.16.8R

The client money resource is the aggregate balance on the firm's client bank accounts.

CASS 7.16.9G
  1. (1)

    A firm should ensure that the amount it reflects in its internal client money reconciliation as its client money resource is equal to the aggregate balance on its client bank accounts. For example, if:

    1. (a)

      a firm holds client money received as cash, cheques or payment orders but not yet deposited in a client bank account (in accordance with CASS 7.13.32 R); and

    2. (b)

      that firm records all receipts from clients, whether or not yet deposited with a bank, in its cashbook (see CASS 7.16.26 G (1)(a));

    its client money resource should not include the cash, cheques or payment orders received but not yet deposited in a client bank account.

  2. (2)

    The guidance in (1) is consistent with a firm's obligations to maintain its internal records in an accurate way, particularly their correspondence to the client money held for clients.

Client money requirement

CASS 7.16.10R

Subject to CASS 7.16.12 R, the client money requirement must be calculated by one, but not both, of the following of two methods:

  1. (1)

    the individual client balance method (CASS 7.16.16 R); or

  2. (2)

    the net negative add-back method (CASS 7.16.17 R).

CASS 7.16.11R

The net negative add-back method may only be used, under this section, by a CASS 7 asset management firm or a CASS 7 loan-based crowdfunding firm and only if such firms do not undertake any margined transactions for, or on behalf of, their clients.

CASS 7.16.12R
CASS 7.16.13G
  1. (1)

    The client money requirement should represent the total amount of client money a firm is required to have segregated in client bank accounts under the client money rules.

  2. (2)

    CASS 7.16.11 R does not prevent a firm from adopting a net negative add-back method as part of a non-standard method of internal client money reconciliation.

  3. (3)

    CASS 7.16.12 R does not prevent a CASS loan-based crowdfunding firm from adopting the individual client balance method as part of a non-standard method of internal client money reconciliation.

  4. (4)

    If a firm uses the individual client balance method in respect of some of its business lines and the net negative add-back method in respect of others it will be conducting a non-standard method of internal client money reconciliation.

CASS 7.16.14G
  1. (1)

    The individual client balance method (CASS 7.16.16 R) may be applied by any firm except a CASS 7 loan-based crowdfunding firm. This method requires a firm to calculate the total amount of client money it should be segregating in client bank accounts by reference to how much the firm should be holding in total (ie, across all its client bank accounts and businesses) for each of its individual clients for:

    1. (a)

      non-margined transactions (CASS 7.16.16 R (1) and CASS 7.16.21 R);

    2. (b)

      margined transactions (CASS 7.16.16 R (2) and CASS 7.16.32 R); and

    3. (c)

      certain other matters (CASS 7.16.16 R (3) and CASS 7.16.25 R).

  2. (2)
    1. (a)

      CASS 7.16.22 E is an evidential provision which sets out a method firms should use for calculating how much they should be holding in total for each individual client for non-margined transactions.

    2. (b)

      The calculation in CASS 7.16.22 E permits a firm to calculate either one individual client balance across all its products and business lines1 for each client or a number of individual client balances for each1 client equal to the number of products or business lines1 operated by the firm in connection with that client1 (see CASS 7.16.22 E (1)).

    3. (c)

      The calculation referred to in (2)(b) may also be applied by different types of firms and, as a result, each firm will need to apply the calculation in way which recognises the business model under which that firm operates.

CASS 7.16.15G

The net negative add-back method (CASS 7.16.17 R) is available to CASS 7 asset management firms and CASS 7 loan-based crowdfunding firms, many of whom may operate internal ledger systems on a bank account by bank account, not client-by-client, basis. This method allows a firm to calculate the total amount of client money it is required to have segregated in client bank accounts by reference to:

  1. (1)

    the balances in each client bank account (see CASS 7.16.17 R (1) and CASS 7.16.18 G (2));

  2. (2)

    whether any individual client's net position in a specific client bank account is negative (see CASS 7.16.17 R (2) and CASS 7.16.18 G (2)); and

  3. (3)

    certain other matters (see CASS 7.16.17 R (2) and CASS 7.16.25 R).

Client money requirement calculation: individual client balance method

CASS 7.16.16R

Subject to CASS 7.16.25 R and CASS 7.16.37 R, under this method the client money requirement must be calculated by taking the sum of, for all clients and across all products and accounts:

  1. (1)

    the individual client balances calculated under CASS 7.16.21 R, excluding:

    1. (a)

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

    2. (b)

      clients' equity balances;

  2. (2)

    the total margined transaction requirement (calculated under CASS 7.16.32 R); and

  3. (3)

    any amounts that have been segregated as client money according to the firm's records under any of the following: CASS 7.13.51 R (1) (prudent segregation record), CASS 7.13.66 R (alternative approach mandatory prudent segregation record) and/or1 CASS 7.13.74 R (clearing arrangement mandatory prudent segregation record).

Client money requirement calculation: net negative add-back method

CASS 7.16.17R

Subject to CASS 7.16.25 R, under this method the client money requirement must be calculated by taking the sum of, for each client bank account:

  1. (1)

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

  2. (2)

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

CASS 7.16.18G
  1. (1)

    A firm which utilises the net negative add-back method is reminded that it must do so in a way which allows it to maintain its records so that, at any time, the firm is able to promptly determine the total amount of client money it should be holding for each client (see CASS 7.15.5 R (1)).

  2. (2)

    For the purposes of CASS 7.16.17 R, a firm should be able to readily use the figures previously recorded in its internal records and ledgers (for example, its cashbook or other internal accounting records) as at the close of business on the previous business day without undertaking any additional steps to determine the balances in the firm's client bank accounts.

CASS 7.16.19G
  1. (1)

    A firm which utilises the net negative add-back method may1 calculate its client money requirement and client money resource on a bank account by bank account basis;

  2. (2)

    For1 the purposes of CASS 7.16.17 R, a firm should take into account any amounts that have been segregated as client money according to the firm's records under either or both CASS 7.13.50 R (prudent segregation record) and CASS 7.13.66 R (alternative approach mandatory prudent segregation record).

Non-margined transactions (eg, securities): individual client balance

CASS 7.16.20G

The sum of positive individual client balances for each client should represent the total amount of all money the firm holds, has received or is obligated to have received or be holding as client money in a client bank account for that client for non-margined transactions.

CASS 7.16.21R

A firm must calculate a client's individual client balances in a way which captures the total amount of all money the firm should be holding as client money in a client bank account for that client for non-margined transactions under the client money rules.

CASS 7.16.22E
  1. (1)

    A firm may calculate either:

    1. (a)

      one individual client balance for each client,1 based on the total of the firm's holdings for that1 client; or

    2. (b)

      a number of individual client balances for each client, equal to the number of products or business lines the firm operates for that client and each balance based on the total of the firm's holdings for that client in respect of the particular product or business line.1

  2. (2)

    Each individual client balance for a client should be calculated in accordance with this table:

    Individual client balance calculation

    Free money (sums held for a client free of sale or purchase (eg, see (3)(a)) and

    A

    sale proceeds due to the client:

    (a)

    for principal deals when the client has delivered the designated investments; and

    B

    (b)

    for agency deals, when:

    (i)

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

    C1

    (ii)

    the firm holds the designated investments for the client; and

    C2

    the cost of purchases:

    (c)

    for principal deals, paid for by the client when the firm has not delivered the designated investments to the client; and

    D

    (d)

    for agency deals, paid for by the client when:

    (i)

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

    E1

    (ii)

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

    E2

    Less

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

    F

    proceeds remitted to the client for sales transactions by, or for, the client if the client has not delivered the designated investments.

    G

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

    X

  3. (3)

    When calculating an individual client balance for each client, a firm should also:

    1. (a)

      ensure it includes:

      1. (i)

        client money consisting of dividends received and interest earned and allocated (see CASS 7.11.32 R);

      2. (ii)

        client money consisting of dividends (actual or payments in lieu), stock lending fees and other payments received and allocated (see CASS 6.1.2 G);

      3. (iii)

        money the firm appropriates and segregates as client money to cover an unresolved shortfall in safe custody assets it identifies in its internal records which is attributable to an individual client (see CASS 6.6.54R (2)); and

      4. (iv)

        money the firm segregates as client money instead of an individual client's safe custody asset until such time as the relevant delivery versus payment transaction settles under CASS 6.1.12R (2); and

    2. (b)

      deduct any amounts due and payable by the client to the firm (see CASS 7.11.25 R).

  4. (4)

    Compliance with (1), (2) and (3)1 may be relied on as tending to establish compliance with CASS 7.16.21 R.

CASS 7.16.23R

A firm must calculate an individual client balance using the contract value of any client purchases or sales, being the value to which the client would be contractual entitled to receive or contractually obligated to pay.

CASS 7.16.24G

If a firm calculates each individual client balance on a product-by-product or business line-by-business line1 basis under CASS 7.16.22 E (1)(b), the result should be that the firm does not net client positions across all products and accounts.

Other requirements for calculating the client money requirement

CASS 7.16.25R

When calculating the client money requirement under either of the methods in CASS 7.16.10 R, a firm must:

  1. (1)

    include any unallocated client money (see CASS 7.13.36 R) and unidentified receipts of money it considers prudent to segregate as client money (see CASS 7.13.37 R);

  2. (2)

    include any money the firm appropriates and holds as client money to cover an unresolved shortfall in safe custody assets identified in its internal records which is not attributable, or cannot be attributed to, an individual client (see CASS 6.6.49 R, CASS 6.6.50 R and CASS 6.6.54 R);

  3. (3)

    take into account any client money received as cash, cheques or payment orders but not yet deposited into a client bank account under CASS 7.13.32 R (see also CASS 7.15.9 R);

  4. (4)

    if it has drawn any cheques or other payable orders, to discharge its fiduciary duty to its clients and continue to treat the sum concerned as forming part of its client money requirement until the cheque or order is presented and paid by the bank (see CASS 7.11.40 R); and

  5. (5)

    ensure it has taken into account all client money the firm should be holding in connection with clients' non-margined transactions.

CASS 7.16.26G
  1. (1)

    Under CASS 7.16.25 R (3), where a firm holds client money received as cash, cheques or payment orders but not yet deposited in a client bank account under CASS 7.13.32 R, it may:

    1. (a)

      include these balances when calculating its client money requirement (eg, where the firm records all receipts from clients, whether or not yet deposited with a bank, in its cashbook); or

    2. (b)

      exclude these balances when calculating its client money requirement (eg, where the firm only records client receipts to its cashbook once deposited with a bank).

  2. (2)

    In line with (1)(a), the firm will need to ensure that, before finalising the calculation of its client money requirement within this section, it deducts these balances, to ensure that they do not give rise to a discrepancy between the firm's client money requirement and client money resource (see CASS 7.15.29 R).

  3. (3)

    In line with (1)(b), although the balances concerned do not form part of the firm's client money requirement, the firm must continue to account for all receipts of client money as cash, cheques or payment orders but not yet deposited in a client bank account in its records and accounts (see CASS 7.13.32 R and CASS 7.15.9 R).

CASS 7.16.27G
  1. (1)

    In accordance with CASS 7.16.25 R (5), where a firm has allowed another person to hold client money in connection with a client's non-margined transaction (eg, in a client transaction account under CASS 7.14 (Client money held by a third party))1, the firm should include these balances when calculating its client money requirement.

  2. (2)

    If a firm is utilising the individual client balance method (CASS 7.16.16 R) to calculate its client money requirement, CASS 7.16.21 R requires the firm to include the sums its holds for each client that are placed with another person in connection with a client's non-margined transaction when calculating a client's individual client balance (eg, see CASS 7.16.22 E and items C1 and E2).

  3. (3)

    Under (1) and (2), the firm will need to ensure that, before finalising the calculation of its client money requirement within this section, it deducts positive2 balances held for clients adding back negative balances attributable to2 clients' non-margined transactions in client transaction accounts, to ensure that they do not give rise to a discrepancy between the firm's client money requirement and client money resource (see CASS 7.15.29 R).

  4. (4)

    Under (1), (2) and (3), in determining the balances of client money a firm has allowed another person to hold in connection with a client's non-margined transaction or the balances held for clients' non-margined transactions in client transaction accounts, a firm should use the values contained in its internal records and ledgers (see CASS 7.15.13 R).

Margined transactions (eg, derivatives): equity balances

CASS 7.16.28R

Subject to CASS 7.16.30 R, a client's equity balance is the amount which the firm would be liable to pay to the client (or the client to the firm) under the client money rules for margined transactions if each of the open positions were liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and the account with the firm were closed. This notional balance should include any unrealised losses or profits associated with that client's open positions, and any margin the firm has received from the client in connection with those positions.

CASS 7.16.29R

Subject to CASS 7.16.30 R, a firm's equity balance is the amount which the firm would be liable to pay to the exchange, clearing house, intermediate broker or OTC counterparty (or vice-versa) for the firm's margined transactions if each of the open positions of those of the firm's clients that are entitled to protection under the client money rules were liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and the firm's client transaction accounts with that exchange, clearing house, intermediate broker or OTC counterparty were closed. This notional balance should include any unrealised losses or profits associated with the open positions the firm holds for clients and any margin the firm holds for clients in the relevant client transaction accounts.

CASS 7.16.30R

The terms 'client's equity balance' and 'firm's equity balance' refer to cash values and do not include non-cash collateral or other designated investments (including approved collateral) the firm holds for a margined transaction.

Margined transactions (eg, derivatives): margined transaction requirement

CASS 7.16.31G

The margined transaction requirement should represent the total amount of client money a firm is required under the client money rules to segregate in client bank accounts for margined transactions. The calculation in CASS 7.16.33 R is designed to ensure that an amount of client money is held in client bank accounts which equals at least the difference between the equity the firm holds at exchanges, clearing houses, intermediate brokers and OTC counterparties for margined transactions for clients entitled to protection under the client money rules, and the amount due to clients under the client money rules for those same margined transactions. With this calculation, a firm's margined transaction requirement should represent, if positions were unwound, the firm's gross liabilities to clients entitled to protection under the client money rules for margined transactions.

CASS 7.16.32R

The total margined transaction requirement is:

  1. (1)

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

  2. (2)

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

  3. (3)

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

CASS 7.16.33R
  1. (1)

    To meet the total margin transaction requirement3, a firm may appropriate and use its own approved collateral, provided it meets the requirements in (2).

  2. (2)

    The firm must hold the approved collateral in a way which ensures that, in accordance with CASS 7A.2.3A R, the approved collateral will be liquidated on the occurrence of a primary pooling event and the proceeds paid into a client bank account, and in so doing:

    1. (a)

      ensure the approved collateral is clearly identifiable as separate from the firm's own property and is recorded by the firm in its records as being held for its clients;

    2. (b)

      keep a record of the actions the firm has taken under this rule which includes a description of the terms on which the firm holds the approved collateral, identifies that the approved collateral is held for the benefit of its clients and specifies the approved collateral that the firm has appropriated for the purposes of this rule; and

    3. (c)

      update the record made under (b) whenever the firm ceases to appropriate and use approved collateral under this rule.

CASS 7.16.34G

Where CASS 7.16.33 R applies, the firm will be reducing the requirement arising from CASS 7.16.16 R (2) and, as such, simultaneously reducing its overall client money requirement (ie, the amount of money the firm is required to segregate in client bank accounts).

CASS 7.16.35R

If a firm's total margined transaction requirement is negative, the firm must treat it as zero for the purposes of calculating its client money requirement.

LME bond arrangements

CASS 7.16.36R

A firm with a Part 30 exemption order which also operates an LME bond arrangement for the benefit of US-resident investors must exclude the client equity balances for transactions undertaken on the LME on behalf of those US-resident investors from the calculation of the margined transaction requirement, to the extent those transactions are provided for by an LME bond arrangement (see CASS 12.2.3 G).1

Reduced client money requirement option

CASS 7.16.37R

Where appropriate, a firm may:

  1. (1)

    when, in respect of a client, there is a positive individual client balance and a negative client equity balance, offset the credit against the debit and, therefore, have a reduced individual client balance in CASS 7.16.21 R for that client; and

  2. (2)

    when, in respect of a client, there is a negative individual client balance and a positive client equity balance, offset the credit against the debit and, therefore, have a reduced client equity balance (CASS 7.16.28 R) for that client.

CASS 7.16.38G

The effect of CASS 7.16.37 R is to allow a firm to offset, on a client-by-client basis, a negative amount with a positive amount arising out of the calculations in CASS 7.16.21 R and CASS 7.16.28 R and, therefore, reduce its overall client money requirement.