FSA has made changes to its Client Assets Sourcebook following consultation. Feedback on the consultation was positive, although the final rules include a number of changes to reflect:
- concerns expressed by respondents, mainly on prime brokerage disclosure and reporting and on custodial liens; and
- requests from Treasury.
FSA has considered the effects of the Lehman Brothers International (Europe) case and thinks it will have to carry out a comprehensive review of CASS once the final appeal in the case has been determined. The changes to CASS reflect:
- rules for UK-authorised prime brokers and their overseas branches, as well as UK branches of non-EEA prime brokers who are subject to CASS, relating to a disclosure annex for contractual rehypothecation and daily reporting being available to all clients. There are new definitions in the Glossary relating to prime brokerage. These requirements take effect from 1 March 2011;
- rules for all UK-authorised investment firms and their overseas branches, and UK branches of non-EEA firms that are subject to CASS, to restrict intra-group placing of client money deposits, and to place a general prohibition on general or omnibus liens in custodian agreements. A 20% group bank limit takes effect from 1 June 2011 but liens are restricted from 1 March 2011 (with a transitional period to 1 October 2011); and
- rules for all UK-authorised investment firms and their overseas branches, and UK branches of non-EEA firms that are subject to CASS, to establish a new Client Money and Asset Return (CMAR) and require firms to appoint a person to take responsibility for CASS compliance and to the new CASS operational oversight controlled function. However, FSA will not require defined small firms to appoint someone to this role. These rules take effect from 1 January 2011 for apportionment of CASS operational oversight responsibility (and the CASS classification of firms), 1 October 2011 for the new controlled function and 1 June 2011 for the CMAR.
FSA also carried out a post-implementation review of insolvency-remote special purpose vehicles that hold client money and assets. It concludes there is a growing trend of using these vehicles to hold the assets of prime brokers' clients without putting them at risk if the broker becomes insolvent. FSA notes none of the structures has been fully tested in real insolvencies or in court, but says buy-side participants should consider whether the services are suitable for their own and their clients' needs.