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CASS 7A.3 Secondary pooling events

Failure of a bank, intermediate broker, settlement agent or OTC counterparty: secondary pooling events

CASS 7A.3.1RRP

A secondary pooling event occurs on the failure of a third party to which client money held by the firm has been transferred underCASS 7.4.1R (1) to CASS 7.4.1R (3) (Depositing client money) or CASS 7.5.2 R (Transfer of client money to a third party).

CASS 7A.3.2RRP

CASS 7A.3.6 R to CASS 7A.3.18 R do not apply if, on the failure of the third party, the firm repays to its clients or pays into a client bank account, at an unaffected bank, an amount equal to the amount of client money which would have been held if a shortfall had not occurred at that third party.

CASS 7A.3.3G

When client money is transferred to a third party, a firm continues to owe fiduciary duties to the client. Whether a firm is liable for a shortfall in client money caused by a third party failure will depend on whether it has complied with its duty of care as agent or trustee.

Failure of a bank

CASS 7A.3.4GRP

When a bank fails and the firm decides not to make good the shortfall in the amount of client money held at that bank, a secondary pooling event will occur in accordance with CASS 7A.3.6 R. The firm would be expected to reflect the shortfall that arises at the failed bank in its records of the entitlement of clients and of money held with third parties.

CASS 7A.3.5GRP

The client money distribution rules seek to ensure that clients who have previously specified that they are not willing to accept the risk of the bank that has failed, and who therefore requested that their client money be placed in a designated client bank account at a different bank, should not suffer the loss of the bank that has failed.

Failure of a bank: pooling

CASS 7A.3.6RRP

If a secondary pooling event occurs as a result of the failure of a bank where one or more general client bank accounts are held, then:

  1. (1)

    in relation to every general client bank account of the firm, the provisions of CASS 7A.3.8 R, CASS 7A.3.13 R and CASS 7A.3.14 R will apply;

  2. (2)

    in relation to every designated client bank account held by the firm with the failed bank, the provisions of CASS 7A.3.10 R, CASS 7A.3.13 R and CASS 7A.3.14 R will apply;

  3. (3)

    in relation to each designated client fund account held by the firm with the failed bank, the provisions of CASS 7A.3.11 R, CASS 7A.3.13 R and CASS 7A.3.14 R will apply;

  4. (4)

    any money held at a bank, other than the bank that has failed, in designated client bank accounts, is not pooled with any other client money; and

  5. (5)

    any money held in a designated client fund account, no part of which is held by the bank that has failed, is not pooled with any other client money.

CASS 7A.3.7R

If a secondary pooling event occurs as a result of the failure of a bank where one or more designated client bank accounts or designated client fund accounts are held, then:

  1. (1)

    in relation to every designated client bank account held by the firm with the failed bank , the provisions of CASS 7A.3.10 R, CASS 7A.3.13 R and CASS 7A.3.14 R will apply; and

  2. (2)

    in relation to each designated client fund account held by the firm with the failed bank , the provisions of CASS 7A.3.11 R, CASS 7A.3.13 R and CASS 7A.3.14 R will apply.

CASS 7A.3.8RRP

Money held in each general client bank account and client transaction account of the firm must be treated as pooled and:

  1. (1)

    any shortfall in client money held, or which should have been held, in general client bank accounts and client transaction accounts, that has arisen as a result of the failure of the bank, must be borne by all the clients whose client money is held in either a general client bank account or client transaction account of the firm, rateably in accordance with their entitlements;

  2. (2)

    a new client money entitlement must be calculated for each client by the firm, to reflect the requirements in (1), and the firm's records must be amended to reflect the reduced client money entitlement;

  3. (3)

    the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and

  4. (4)

    the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), and where relevant SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance).

CASS 7A.3.9GRP

The term "which should have been held" is a reference to the failed bank's failure to hold the client money at the time of the pooling event.

CASS 7A.3.10RRP

For each client with a designated client bank account held at the failed bank:

  1. (1)

    any shortfall in client money held, or which should have been held, in designated client bank accounts that has arisen as a result of the failure, must be borne by all the clients whose client money is held in a designated client bank account of the firm at the failed bank, rateably in accordance with their entitlements;

  2. (2)

    a new client money entitlement must be calculated for each of the relevant clients by the firm, and the firm's records must be amended to reflect the reduced client money entitlement;

  3. (3)

    the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and

  4. (4)

    the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R, and where relevant SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance).

CASS 7A.3.11RRP

Money held in each designated client fund account with the failed bank must be treated as pooled with any other designated client fund accountsof the firm which contain part of the same designated fund and:

  1. (1)

    any shortfall in client money held, or which should have been held, in designated client fund accounts that has arisen as a result of the failure, must be borne by each of the clients whose client money is held in that designated fund, rateably in accordance with their entitlements;

  2. (2)

    a new client money entitlement must be calculated for each client by the firm, in accordance with (1), and the firm's records must be amended to reflect the reduced client money entitlement;

  3. (3)

    the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and

  4. (4)

    the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), and where relevant SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance).

CASS 7A.3.12RRP

A client whose money was held, or which should have been held, in a designated client bank account with a bank that has failed is not entitled to claim in respect of that money against any other client bank account or client transaction account of the firm.

Client money received after the failure of a bank

CASS 7A.3.13RRP

Client money received by the firm after the failure of a bank, that would otherwise have been paid into a client bank account at that bank :

  1. (1)

    must not be transferred to the failed bank unless specifically instructed by the client in order to settle an obligation of that client to the failed bank; and

  2. (2)

    must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:

    1. (a)

      on the written instruction of the client, transferred to a bank other than the one that has failed; or

    2. (b)

      returned to the client as soon as possible.

CASS 7A.3.14RRP

If a firm receives a mixed remittance after the secondary pooling event which consists of client money that would have been paid into a general client bank account, a designated client bank account or a designated client fund account maintained at the bank that has failed, it must:

  1. (1)

    pay the full sum into a client bank account other than one operated at the bank that has failed; and

  2. (2)

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

CASS 7A.3.15GRP

Whenever possible the firm should seek to split a mixed remittance before the relevant accounts are credited.

Failure of an intermediate broker, settlement agent or OTC counterparty: Pooling

CASS 7A.3.16R

If a secondary pooling event occurs as a result of the failure of an intermediate broker, settlement agent or OTC counterparty, then in relation to every general client bank account and client transaction account of the firm, the provisions of CASS 7A.3.17 R and CASS 7A.3.18 R will apply.

CASS 7A.3.17R

Money held in each general client bank account and client transaction account of the firm must be treated as pooled and:

  1. (1)

    any shortfall in client money held, or which should have been held, in general client bank accounts and client transaction accounts, that has arisen as a result of the failure, must be borne by all the clients whose client money is held in either a general client bank account or a client transaction account of the firm, rateably in accordance with their entitlements;

  2. (2)

    a new client money entitlement must be calculated for each client by the firm, to reflect the requirements of (1), and the firm's records must be amended to reflect the reduced client money entitlement;

  3. (3)

    the firm must make and retain a record of each client's share of the client money shortfall at the failed intermediate broker, settlement agent or OTC counterparty until the client is repaid; and

  4. (4)

    the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), and where relevant SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance).

Client money received after the failure of an intermediate broker, settlement agent or OTC counterparty

CASS 7A.3.18R

Client money received by the firm after the failure of an intermediate broker, settlement agent or OTC counterparty, that would otherwise have been paid into a client transaction account at that intermediate broker, settlement agent or OTC counterparty:

  1. (1)

    must not be transferred to the failed third party unless specifically instructed by the client in order to settle an obligation of that client to the failed intermediate broker, settlement agent or OTC counterparty; and

  2. (2)

    must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:

    1. (a)

      on the written instruction of the client, transferred to a third party other than the one that has failed; or

    2. (b)

      returned to the client as soon as possible.

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

CASS 7A.3.19RRP

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

  1. (1)

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

  2. (2)

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