'Our implementation proposals do not mean significant
changes to CASS as MIFID II is broadly aligned. We therefore think
firm impact will be small' – FCA, MIFID II
Implementation – Consultation paper II CP16/19.
Will the impact of changes to the CASS rules be small for every
firm? With so much else to consider as part of MiFID II
implementation, investment firms could be forgiven for overlooking
proposed changes to CASS arrangements. But some of these may have a
considerable impact on specific businesses. Here, Deloitte's
CASS advisory specialists highlight some potential challenges in
meeting key aspects of the new rules. So what to focus on?
Title Transfer Collateral Arrangements
The proposed changes to the use of Title Transfer Collateral
Arrangements (TTCAs) could have a major impact for some firms, and
require careful consideration.
The appropriateness of using TTCAs will need to be considered
for each client, and their use is now prohibited for retail
clients. However, there is currently no guidance about how
frequently appropriateness must be considered. Specific factors
must be taken into account, such as the amount of a client's
obligation, which can change daily.
The commentary in CP16/19 is clear that firms should consider
preventing 'automatic, blanket use of TTCAs for all
clients, without considering their liabilities.' Many
firms are currently using TTCAs this way and will need to rethink
Above all else, firms will need a clear policy on what
'appropriateness' looks like to them, and set up the
monitoring needed to evaluate TTCAs.
Use of Money Market Funds for client money
With interest rates low, more firms are likely to be considering
using qualifying money market funds (MMFs) for clients' money.
The new rules require careful due diligence and consideration of
diversification before using MMFs. Firms will need to ensure
that clients give explicit consent to the placement of their money
in a MMF – something that could further restrict their
The new rules make a firm responsible if a third party of a
third party (sub-custodians and similar) fails to meet the deposit
requirements for custody assets – this becomes a reportable
Extra work could be needed to monitor third parties, and
existing agreements may need to be updated.
Most firms should have already considered the responsibility for
CASS operational oversight. However, the new rules go further in
clarifying the FCA's expectations of a CF10a.
A CF10a must have sufficient skill and authority, and firms must
allocate this responsibility to a single director or senior manager
(or more under a job-share arrangement). Guidance is explicit that
the FCA 'would normally expect a firm not to allocate any
additional responsibilities...' to the allocated person unless
appropriate to do so at 'a small and non-complex firm'.
Policy documents and role descriptions may need to be updated to
reflect the new rules.
Article 5(4) of the MiFID II implementing directive requires
firms to take collateral and monitor its continuing appropriateness
when arranging securities lending. In most instances this may
already be happening. However, firms that facilitate stock-lending
(or allow third party firms to use client assets) will need to
consider how to demonstrate compliance with the new rules (as well
as keeping a close eye on the implementation of the Securities
Finance Transactions Regulation), for example establishing a clear
process to value collateral against stock-lending obligations.
MiFID II now follows the UK approach in prohibiting the use of
general liens over client assets. Firms will need to demonstrate
that all arrangements have been reviewed.
Where general liens are in place, firms will need to consider
whether it is possible to demonstrate a legal requirement for the
lien. Obtaining legal assurance in third country jurisdictions can
be expensive and time-consuming.
Summary and next steps
It is unlikely that there will be significant changes to the
final rules before these come into effect in 2018; so firms can
already begin to consider how to demonstrate compliance with the
new CASS rules. The key will be to establish clear policies and
processes for the appropriate use of collateral, with good
assurance these work, and to schedule compliance checks on all
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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