Yesterday, in its quarterly consultation paper (CP 10/15), the FSA formally announced its intention to prevent investment firms using title transfer collateral arrangements (TTCAs) with retail clients.
TTCAs are utilised by derivatives firms that enter into margined transactions with clients – primarily contracts for differences (CFD) and spread betting firms in the context of retail clients. TTCAs allow those firms to treat margin (the amount paid by the client as collateral to open the position or bet) as their own working capital, rather than client money (which must be segregated). Often, those firms subsequently use that money to fund their hedging arrangements, or other business ventures. In the event of a firm's insolvency, margin money that fell under a TTCA would be recoverable only on an unsecured creditor basis (rather than a ring-fenced trust basis), and might therefore be irrecoverable if the firm has no assets to distribute on insolvency.
Despite the fact that MiFID and the current FSA guidance appears to permit the use of TTCAs for all types of client, the FSA now views them as an unacceptable risk in the context of retail clients, who are not deemed to have the ability to understand the insolvency risk, and who should be therefore given better protection.
This move, which is part of a wider FSA programme to overhaul the client money rules and reduce the risk of irrecoverability of client money on a firm's insolvency, is likely to have serious implications for the treasury arrangements of CFD and spread betting firms, and may have further unintended consequences.
For an analysis of FSA's proposals, including how these changes will impact on derivatives (CFD and spread bet) providers that are authorised as investment firms, please read our RegZone report. http://www.law-now.comhttp://www.law-now.com/cmck/pdfs/nonsecured/ttcajuly10.pdf
To read CP 10/15 see here. http://www.fsa.gov.uk/pubs/cp/cp10_15.pdf
The client assets and living wills page on our Regzone contains more useful information relevant to this topic – please see here. http://www.law-now.comhttp://www.law-now.com/xc.asp?g=A7C184F8-EC92-4489-A1B7-578E9B035D5B
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 07/07/2010.
