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CASS 7A.1 Application and purpose

Application

CASS 7A.1.1 R

1 Subject to CASS 7A.1.1A R, this2 chapter (the client money distribution rules) applies to a firm that holds client money which is subject to the client money rules when a pooling event2 occurs.

2 2
CASS 7A.1.1A R
CASS 7A.1.1B G

2As a result of CASS 7A.1.1A R, the client money distribution rules relating to primary pooling events and secondary pooling events will not affect any client money held by a firm in its capacity as trustee firm. Instead, the treatment of that client money will be determined by the terms of the relevant instrument of trust or by applicable law. However, the client money distribution rules do apply to a firm for any client money that it holds other than in that capacity which is subject to the client money rules.

Purpose

CASS 7A.1.2 G

The client money distribution rules seek to facilitate the timely return of client money to a client in the event of the failure of a firm or third party at which the firm holds client money.

CASS 7A.2 Primary pooling events

Failure of the authorised firm: primary pooling event

CASS 7A.2.1 G
  1. (1)

    A firm can hold client money in a general client bank account, a designated client bank account or a designated client fund account.

  2. (2)

    A firm holds all client money in general client bank accounts for its clients as part of a common pool of money so those particular clients do not have a claim against a specific sum in a specific account; they only have a claim to the client money in general.

  3. (3)

    A firm holds client money in designated client bank accounts or designated client fund accounts for those clients that requested their client money be part of a specific pool of money, so those particular clients do have a claim against a specific sum in a specific account; they do not have a claim to the client money in general unless a primary pooling event occurs. A primary pooling event triggers a notional pooling of all the client money, in every type of client money account, and the obligation to distribute it.

  4. (4)

    If the firm becomes insolvent, and there is (for whatever reason) a shortfall in money held for a client compared with that client's entitlements, the available funds will be distributed in accordance with the client money distribution rules.

CASS 7A.2.2 R

A primary pooling event occurs:

  1. (1)

    on the failure of the firm;

  2. (2)

    on the vesting of assets in a trustee2 in accordance with an 'assets requirement' imposed under section 55P(1)(b) or (c) (as the case may be) of the Act;

    2
  3. (3)

    on the coming into force of a requirement for all client money held by the firm; or

  4. (4)

    when the firm notifies, or is in breach of its duty to notify, the FCA, in accordance with CASS 7.15.33 R4 (Notification requirements), that it is unable correctly to identify and allocate in its records all valid claims arising as a result of a secondary pooling event.

    4
CASS 7A.2.3 R

CASS 7A.2.2R (4) does not apply so long as:

  1. (1)

    the firm is taking steps, in consultation with the FCA, to establish those records; and

  2. (2)

    there are reasonable grounds to conclude that the records will be capable of rectification within a reasonable period.

CASS 7A.2.3A R

4If a primary pooling event occurs in circumstances where the firm had, before the primary pooling event, reduced its margined transaction requirement by utilising approved collateral under CASS 7.16.33 R4 , it must immediately liquidate this approved collateral and place the proceeds in a client bank account.

4
CASS 7A.2.3B R

4 CASS 7A.2.7 R (Client money received after the failure of the firm) does not apply to the proceeds under CASS 7A.2.3A R.

CASS 7A.2.3C G

4The proceeds of the assets realised under CASS 7A.2.3A R:

  1. (1)

    will form part of the notional pool of client money (see CASS 7A.2.4 R (Pooling and distribution); and

  2. (2)

    must be distributed in accordance with this chapter.

Pooling and distribution

CASS 7A.2.4 R

If a primary pooling event occurs, then4:

  1. (1)
    1. (a)

      in respect of a sub-pool,4 the following is treated as a single notional pool of client money for the beneficiaries of that pool:45

      1. (i)

        any client money held in a client bank account of the firm relating to that sub-pool; and5

      2. (ii)

        any client money held in a client transaction account of the firm relating to that sub-pool, except for client money held in a client transaction account at an authorised central counterparty3 or a clearing member which is, in either case, held as part of a 4regulated clearing arrangement;5

    2. (b)

      in respect of the general pool, the following is treated as a single notional pool of client money for the beneficiaries of the general pool:5

      1. (i)

        any client money held in any client bank account of the firm;5

      2. (ii)

        any client money held in a client transaction account of the firm, except for client money held in a client transaction account at an authorised central counterparty, or a clearing member which is, in either case, held as part of a regulated clearing arrangement; and5

      3. (iii)

        any client money identifiable in any other account held by the firm into which client money has been received;5

      except, in each case, for client money relating to a sub-pool which falls under (1)(a)(i) or (ii).5

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  2. (2)

    the firm must :4

    4
    1. (a)

      4distribute client money comprising a notional pool in accordance with CASS 7.17.2 R4 , so that each client who is a beneficiary of that pool receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7A.2.5 R; or

      4
    2. (b)

      4(where applicable) transfer client money comprising a sub-pool to effect or facilitate porting of positions held for the clients who are beneficiaries of that sub-pool; and

  3. (3)

    1if, in connection with a regulated clearing arrangement, client money is remitted directly to the firm3either from an authorised central counterparty3 or from a clearing member, then:

    1. (a)

      any such remittance in respect of a client transaction account that is an individual client account must be distributed to the relevant client subject to CASS 7.17.2R (4)4 ;

      4
    2. (b)

      subject to (3)(c) and (d)4, any such remittance in respect of a client transaction account that is an omnibus client account must form part of the notional pool4 under CASS 7A.2.4R (1) and be subject to distribution in accordance with CASS 7A.2.4R (2);

      4
    3. (c)

      any such remittance in respect of a client transaction account that is an omnibus client account must be distributed to the3 relevant clients for whom that omnibus client account is held if:

      1. (i)

        no client money in excess of the amount recorded in that omnibus client account is held by the firm as margin in relation to the positions recorded in that omnibus client account; and4

      2. (ii)

        the amount of such remittance attributable to each client of the omnibus client account is readily apparent from information provided to the firm 4 by the authorised central counterparty3 or, in the case of indirect clients, the clearing member;

        4

      in which case the amount of such remittance must be distributed to each such client in accordance with the information provided by the authorised central counterparty3or clearing member subject to CASS 7.17.2R (4)4 ; and4

      4
    4. (d)

      4any such remittance in respect of a client transaction account that is a net margined omnibus client account in respect of which the firm maintains a sub-pool must form part of such sub-pool to be distributed in accordance with CASS 7A.2.4R (2)(a).

CASS 7A.2.4A G
  1. (1)

    1Under EMIR, where a firm that is a clearing member4 of an authorised central counterparty defaults, the authorised central counterparty may:

    4
    1. (a)

      portclient positions where possible; and

    2. (b)

      after the completion of the default management process:

      1. (i)

        return any balance due directly to those clients for whom the positions are held, if they are known to the authorised central counterparty; or

      2. (ii)

        remit any balance to the firm for the account of its clients if the clients are not known to the authorised central counterparty.

  2. (1A) 3

    Under the EMIR L2 Regulation, where a firm acting in connection with a regulated clearing arrangement for a client (who is also an indirect client) defaults, the clearing member with whom the firm has placed client money of the indirect client, may, in accordance with the EMIR L2 Regulation:

    1. (a)

      transfer the positions and assets either to another clearing member of the relevant authorised central counterparty or to another firm willing to act for the indirect client; or

    2. (b)

      liquidate the assets and positions of the indirect clients and remit all monies due to the indirect clients.

  3. (1B)

    For the avoidance of doubt, 'relevant clients' in the case of CASS 7A.2.4R (3)(a) and CASS 7A.2.4R (3)(c) includes a client who is also an indirect client.

  4. (2)

    Where any balance remitted from an authorised central counterparty3or, in the case of indirect clients, a clearing member, to a firm is client money, CASS 7A.2.4R (3) provides for the distribution of remittances from either an individual client account or an omnibus client account.

  5. (3)

    Remittances received by the firm falling within CASS 7A.2.4R (3)(a) and CASS 7A.2.4R (3)(c) should not be pooled with client money held in any client bank account operated by the firm at the time of the primary pooling event. Those remittances should be segregated and promptly distributed to each client on whose behalf the remittance was received.

  6. (4)

    For the avoidance of doubt,3 in respect of a regulated clearing arrangement, any client money remitted by the authorised central counterparty3 or, in the case of indirect clients, the clearing member, to the firm pursuant to CASS 7A.2.4R (3) should not be treated as client money received after the failure of the firm under CASS 7A.2.7 R.

  7. (5)

    4The firm's obligation to its client in respect of client money held in a sub-pool is discharged to the extent that the firm transfers that client money to facilitate porting in accordance with CASS 7.11.34R (8)4 .

    4
CASS 7A.2.5 R
  1. (-1)

    1Each client'sclient equity balance must be reduced by:

    1. (a)

      any amount paid by:

      3
      1. (i)

        an authorised central counterparty to a clearing member other than the firm in connection with a porting arrangement in accordance with CASS 7.11.34R (6)4 in respect of that client;

        4
      2. (ii)

        a clearing member to another clearing member or firm (other than the firm) in connection with a transfer in accordance CASS 7.11.34R (8);4

        4
    2. (b)

      any amount paid by:

      3
      1. (i)

        an authorised central counterparty directly to that client, in accordance withCASS 7.11.34R (7);4 and

        4
      2. (ii)

        3a clearing member directly to an indirect client in accordanceCASS 7.11.34R (9);4 and

        4
    3. (c)

      any amount that must be distributed to that client by the firm in accordance with CASS 7A.2.4R (3)(a) or (c).

  2. (1)

    When, in respect of a client who is a beneficiary of a pool4, there is a positive individual client balance4 and a negative client equity balancein relation to that pool4, the credit for that pool4must be offset against the debit reducing the individual client balance4 for that client.

    44
  3. (2)

    When, in respect of a client who is a beneficiary of a pool4, there is a negative individual client balance4 and a positive client equity balance in relation to that pool4, the credit for that pool4must be offset against the debit for that pool4reducing the client equity balance for that client.

CASS 7A.2.6 G

[deleted]1

1

Client money received after the failure of the firm

CASS 7A.2.7 R

Client money received by the firm after a primary pooling event in respect of a pool4 must not be pooled with client money held in any client money account operated by the firm either in respect of that pool or any other pool4at the time of the primary pooling event. It must be placed in a client bank account that has been opened after that event and must be handled in accordance with the client money rules, and returned to the relevant client without delay, except to the extent that:

  1. (1)

    it is client money relating to a transaction that has not settled at the time of the primary pooling event; or

  2. (2)

    it is client money relating to a client, for whom the client money entitlement, calculated in accordance with CASS 7A.2.5 R, shows that money is due from the client to the firm at the time of the primary pooling event.

CASS 7A.2.7A G

4If a firm opens a client bank account after a primary pooling event, it must comply with CASS 7.18.15R6 regarding acknowledgement letters.

CASS 7A.2.8 G

Client money received after the primary pooling event relating to an unsettled transaction should be used to settle that transaction. Examples of such transactions include:

  1. (1)

    an equity transaction with a trade date before the date of the primary pooling event and a settlement date after the date of the primary pooling event; or

  2. (2)

    a contingent liability investment that is 'open' at the time of the primary pooling event and is due to settle after the primary pooling event.

CASS 7A.2.9 R

If a firm receives a mixed remittance after a primary pooling event, it must:

  1. (1)

    pay the full sum into the separate client bank account opened in accordance with CASS 7A.2.7 R; and

  2. (2)

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

CASS 7A.2.10 G

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

CASS 7A.2.11 R

If both a primary pooling event and a secondary pooling event occur, the provisions of this section relating to a primary pooling event apply.

CASS 7A.3 Secondary pooling events

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

CASS 7A.3.1 R

A secondary pooling event occurs on the failure of a third party to which client money held by the firm has been transferred underCASS 7.13.3R (1) to CASS 7.13.3R (3) (Depositing client money) or CASS 7.14.2 R2 (Transfer of client money to a third party).

2
CASS 7A.3.2 R

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.3.3 G

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.3.4 G

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 the general pool (where the firm maintains only a general pool) and, where relevant, in a particular sub-pool (where the firm maintains both a general pool and one or more sub-pools) 2in its records of the entitlement of clients and of money held with third parties under CASS 7.152 (Records, accounts and reconciliations)2.

2
CASS 7A.3.5 G

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.3.6 R

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 for the general pool or particular sub-pool2, then:

  1. (1)

    in relation to every general client bank account of the firm maintained in respect of that pool2, 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 for the relevant pool2, 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 for the relevant pool2, 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 for the relevant pool2, is not pooled with any other client money held for that pool or any other pool2; and

  5. (5)

    any money held in a designated client fund account in respect of that pool2, no part of which is held by the bank that has failed, is not pooled with any other client money held for that pool or any other pool2.

CASS 7A.3.7 R

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 in respect of a pool2, then:

  1. (1)

    in relation to every designated client bank account held by the firm with the failed bank in respect of that pool2, 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 in respect of that pool2, the provisions of CASS 7A.3.11 R, CASS 7A.3.13 R and CASS 7A.3.14 R will apply.

CASS 7A.3.8 R

Money held in each general client bank account and client transaction account of the firm for the general pool or a sub-pool2must 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 for the relevant pool2, that has arisen as a result of the failure of the bank, must be borne by all the clients of that pool2 whose client money is held in such 2general client bank account or client transaction account of the firm, rateably in accordance with their entitlements;

    2
  2. (2)

    a new client money entitlement must be calculated for each client of the relevant pool2by 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 moneyshortfall 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 7.15.3 R2 (Records and accounts) for that pool2, and where relevant SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance).

    2
CASS 7A.3.9 G

The term "which should have been held" is a reference to the failed bank's failure1 to hold the client money at the time of the pooling event.

CASS 7A.3.10 R

For each client with a designated client bank account maintained by the firm for the general pool or a particular sub-pool and2 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 of the relevant pool2 whose client money is held in a designated client bank account of the firm at the failed bank, rateably in accordance with their client money2 entitlements;

  2. (2)

    a new client money entitlement must be calculated for each of the relevant clients of the relevant pool2 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 moneyshortfall 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 2CASS 7.15.3 R2 (Records and accounts) in respect of the relevant pool2, and where relevant SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance).

CASS 7A.3.11 R

Money held by the firm2 in each designated client fund account for the general pool or a particular sub-pool with the failedbank must be treated as pooled with any other designated client fund accounts for the general pool or a particular sub-pool as the case may be2 which contain part of the same designated fund and:

2
  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 of the relevant pool2whose 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 of the relevant pool2 by the firm, in accordance with (1), and the firm's records must be amended to reflect the reduced client money entitlement2;

    2
  3. (3)

    the firm must make and retain a record of each client's share of the client moneyshortfall 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 7.15.3 R2 (Records and accounts) for the relevant pool2, and where relevant SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance).

    2
CASS 7A.3.12 R

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.3.13 R

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 , for either the general pool or a particular sub-pool2:

  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 relating to the general pool or the particular sub-pool as the case may be 2that 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.3.14 R

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.3.15 G

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.3.16 R

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 firm2relating to the general pool or a particular sub-pool as the case may be, the provisions of CASS 7A.3.17 R and CASS 7A.3.18 R will apply.

CASS 7A.3.17 R

Money held in each general client bank account and client transaction account of the firm relating to the general pool or a particular sub-pool as the case may be,2must 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 relating to the general pool or the particular sub-pool as the case may be2, 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 relating to the general pool or the particular sub-pool as the case may be2;

  3. (3)

    the firm must make and retain a record of each client's share of the client moneyshortfall at the failedintermediate 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 7.15.3 R2 (Records and accounts), and where relevant SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance).

    2

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

CASS 7A.3.18 R

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 relating to the general pool or a particular sub-pool as the case may be2:

  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 failedintermediate broker, settlement agent or OTC counterparty; and

  2. (2)

    must be, subject to (1), placed in a separate client bank account relating to the general pool or the particular sub-pool as the case may be,2that 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 FCA: failure of a bank, intermediate broker, settlement agent or OTC counterparty

CASS 7A.3.19 R

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

  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.