CASS

Question 1

CASS 6

Answer 1

The custody rules
- applies when a firm holds financial instruments for a client in the course of MiFID business and when safeguarding and administering assets when it comes to non-MiFID business

Question 2

CASS 7

Answer 2

Client money rules

applies to UK MiFID business
- holding client money in course of UK MiFID business
- in the course of business that is non-UK MiFID business in respect of any agreement entered into or be entered into with or for a client
- it holds money in respect of CASS 5 - Client money:insurance mediation

Question 3

What institutions can client money be deposited in according to CASS 7.13.3?

Answer 3

a central bank
Banking Consolidation Directive
a bank authorised in a third country
a qualifying money market fund

firms not depositing money in a central bank must exercise all due skill care and diligence in the selection, appointment and periodic review of the credit institution

Question 4

What were the changes to CASS following the financial crisis?

Answer 4

Increased reporting to clients - daily reporting on client money and assets to all prime brokerage clients. Clients will know exactly whats happening to their assets

Holding client money with group banks - restricting the placement of client money deposits held in client bank accounts within a group to 20%. Limits the amount a client is exposed to group credit risk.

Prohibiting the use of general liens in custodial agreements

Creating a new controlled function with specific responsibility for client money and assets - senior management of the firm should be responsible for oversight and protection of client assets

Introducing a Client Money and Asset Return - reviewed and authorised

Question 5

What does CASS 6.6 set out?

Answer 5

The obligation of firms to perform internal and external reconciliations.
They should be undertaken as often as necessary to ensure the accuracy of a firm’s records and accounts
If possible they should be done by someone who has not been involved in the production and maintenance of the records

Question 6

What methods of reconciliation are considered appropriate for these purposes by the FCA?

Answer 6

Each business day - firm adopting the normal approach should check whether its client money resource, being the aggregate balance on the firm’s client bank accounts is equal to the client money requirement at the close of business on that day

Each business day. a firm that adopts the alternative approach should ensure client money resource, being the aggregate balance on the firm’s bank accounts is equal to the client money requirement

Question 7

What FCA regulations do the reconciliation of client assets and records in bank accounts fall under?

Answer 7

CASS 7.15R and SYSC 4.1.1R and SYSC 6.1.1R

Question 8

CASS EXEMPTION FIRMS - what are they?

Answer 8

ICVCs
UCITS Qualifying schemes
a credit institution under the BCD
money held in connection with a DVP transaction
money due and payable to the firm

Specific rules within CASS may be disapplied depending on the nature of a firm’s activities. The details are set out within the individual rules.

There are specific requirements that firms must comply with in order to cease to treat as client money or assets under unclaimed balance

Firms are able to pay away such balances to a registered charity, providing that the firm can demonstrate that it has taken reasonable steps to trace the clients concerned and return the balance, and has held the balance concerned for at least six years in respect of client money and 12 years for clients’ assets.
a governing body must approve this

Question 9

Who is responsible for setting the standard for CASS Audit reviews?

Answer 9

The financial reporting council is the body responsible for setting the standard for CASS audit reviews

It has developed a ‘Client Asset Assurance Standard’ which establishes requirements and provides guidance for CASS auditors reporting to the FCA in accordance with its SUP rules

Question 10

What is the Client Asset Assurance Standard?

Answer 10

It establishes requirements and provides guidance for CASS auditors reporting to the FCA in accordance with its SUP rules

It establishes requirements for
- the process for forming and expressing reasonable assurance options
- the process for forming and the expression of limited assurance opinions
- the provision of reasonable assurance to the FCA with respect to a firm’s proposed adoption of
1. the alternative approach to client money segregation
2. a non-standard method of client money reconciliation

Question 11

What is the key objective of a CASS Assurance Standard

Answer 11

a. improve the quality of CASS audits and other CASS assurance engagements

b. support and challenge CASS auditors when undertaking CASS assurance engagements and to define the nature and extent of the work effort for reasonable and limited assurance

c. support the objectives of the FCA’s client assets regime regarding the effective safekeeping of client assets and client monies

d. manage the expectation of:
- the management of firms that hold client assets
- third party administrators

e. support the effective training of CASS auditors by both the accounting bodies and other training organisations

f. help to establish realistic expectations regarding the integrity of the UK client assets regime with the beneficial owners of client assets

g. underpin the effectiveness of the FRC’s enforcement and disciplinary activities

Question 12

What should a CASS Auditor review and document?

Answer 12

an evaluation of whether the firm’s organisational status and relevant policies and procedures support the objectivity of the internal auditors or compliance function

an understanding of the nature of internal audit or compliance function

• assessment of whether the function applies a systematic and disciplined approach, including quality control
• the activities the function has performed or intends to perform with respect to client assets

Question 13

What further requirements must CASS auditors evaluate?

Answer 13

the firm has maintained systems accurately to enable it to comply with the custody rules
the firm was made in compliance with the custody rules
If there has been a secondary pooling event during the period, the firm has complied with the relevant client money distribution rules in relation to that pooling event.

the CASS auditor will provide a ‘nil’ return where there have been no breaches

Question 14

Review of Auditors Client Assets Reports

Answer 14

Firms are required to review the ‘draft’ client assets report and where necessary provide an explanation of the circumstances that gave rise to each of the breaches identified in the draft report, and any remedial actions that they have undertaken or plan to undertake to correct those breaches.

Question 15

RIGHTS OF USE

Answer 15

An arrangement under which a client transfers full ownership of assets to a collateral taker (investment firm) to cover the performance associated with the financial obligations

As there is a transfer of full ownership of assets to a firm, they cease to be client assets and so are not subject to CASS requirements.

The exception to this is if it is a retail client

Question 16

REHYPOTHECATION

Answer 16

An alternative name for repledging
- a party that receives a pledge of collateral and then pledges the same collateral to a third party

This is operated by brokers for hedge fund clients where the fund will post collateral against loans they have taken out

Recent history, in the shape of the collapse of both Lehman Brothers and MF Global highlights the pitfalls of clients allowing the firm to reuse their assets as its own. In both cases internal records and accounts were incomplete and it was difficult to identify which assets had been pledged to the firm by which clients and who was owed what.

Question 17

What is a bare security interest?

Answer 17

If a client has lodged collateral with a firm and it is provided on the provision that the collateral is just pledged or a charge is placed on the assets - the firm is not permitted to reuse the assets

The client remains the legal owner of those assets until the bare security interest is exercised or crystallises on the client’s default.

Question 18

CASS Resolution Pack

Answer 18

A CASS Resolution Pack will enable firms that hold client money and client assets to be able to maintain and retrieve certain documents and information relating to the assets and cash that they held on behalf of clients in the event of a crisis, such as insolvency.

Firms must maintain a CASS Resolution Pack at all times

They must be able to retrieve documents under the CASS Resolution Pack within 48 hours

It is to assist an insolvency practitioner with finding out who owns what assets and return them in a timely manner before a company ceases trading

The insolvency of Lehman Brothers International (Europe) and MF Global UK highlighted difficulties in returning client assets in a timely manner and determining who had control over the clients’ assets.

Question 19

Who is required to produce and maintain a CASS Resolution Pack?

Answer 19

people subject to the Custody Rules - CASS 6 and Client Money Rules CASS 7

Question 20

What is in the contents of a CASS RESOLUTION PACK?

Answer 20

Identification of the institution appointed to hold client money to hold or control client money

Identifies each senior manager and director and any other individual and the nature of their responsibility within the firm who are critical/important to the performance of operational functions related to regulatory obligations

Copy of the executed agreement including side letters or other agreements used to clarify/modify the terms of the executed agreement

most internal and external reconciliation of safe custody assets

most recent internal and external reconciliation relating to client money. Most documents and information must be retrievable as soon as possible but no later than 48 hours

documents identifying each appointed representative, tied agent, field representative

group structure

each executed agreement of service providers

copy of the procedures for management, recording and transfer of client money

explanation of the methods of internal reconciliation of client money balances

copies of client categorisation of retail/professional records

Question 21

What is a mandate?

Answer 21

‘A means that give a firm the ability to control a client’s asset or liabilities’

A mandate is required from a client when the client is giving the firm control over their assets and/liabilities

a mandate is required if a firm is undertaking designated investment business , insurance mediation activity and debt management activity

Where a client has a mandate with a firm over the control of assets held at a third party, the client money and custody rules will not apply.

Question 22

What record keeping requirements are necessary for a mandate?

Answer 22

A firm must establish and maintain adequate ecords and internal records in respect of its use of mandates

• includes up to date list of each mandate that a firm has obtained
  a record of each transaction entered into by the firm
• internal controls to show that each transaction entered into by the firm was carried out by the conditions etablished by the firm/client

list of mandates must be kept in a durable medium

Question 23

How did EMiR (European Markets Infrastructure Legislation) affect CASS rules?

Answer 23

Under CASS Rules, the failure of a firm triggers a primary pooling event whereby the firm’s client money is pooled for distribution, including any amount payable by a CCP for client transaction account

In accordance with EMiR requirements, CASS amended so pooling money is held by a clearing member firm in a client transaction account

Question 23

PRIME BROKERAGE

Answer 23

It is the generic name for a package of services offered by securities firms/investment banks to professional investors - to act as settlement agents and provide custody for assets and financing for leverage purposes

Question 23

What amendments were made to CASS 9 (Prime brokerage service) following the financial crash?

Answer 23

REHYPOTHECATION OF ASSETS - prime brokerage agreements to summarise in plain english rehypothecation clauses

INCREASED REPORTING TO CLIENTS - daily reporting on client money and asset holdings to all prime brokerage clients. Clients will know exactly what is happening to their assets.

HOLDING CLIENT MONEY WITHIN GROUP BANKS - cannot hold more than 20% of a client money within one group to avoid institutional credit risk exposure

Question 24

What is a lien in custody agreements?

Answer 24

It is a right to keep property belonging to another person until a debt is paid.

The FCA considers it unacceptable that a client’s assets held with a custodian were subject to a lien, exercised because of the debt of a completely unrelated group entity to the relevant custodian.

Question 25

Who is subject to the CMAR regulatory return?

Answer 25

Medium firms - holding more than £1 million but less than £1 billion

Large firms - held £1 billion worth of client money

Question 26

The FRC (Financial reporting council)

Answer 26

It is expected this will be repealed at some point and replaced with ARGA at some pint