The FSA’s Client Money Distribution rules (CASS 7A) address the timely return of client money to a client in the event of the failure of a firm (‘primary pooling event’) or third party at which the firm holds client money (‘secondary pooling event’). (These terms are explained further below).
These rules effectively mean that all monies held in segregated client money accounts have to be pooled for the benefit of all parties with valid entitlements to that segregated ‘pool’; they are not segregated simply on a client by client basis.
The timeliness and quantum of distributions to those confirmed as having valid entitlements is therefore impacted by the time required to identify the quantum of all eligible client money claims. Moreover, the costs related to this distribution process need to be attributed before client money can be paid to relevant clients.
In relation to these specific points:
Segregation of Client Money:
Client money is generally required to be held with a bank in a ‘general client bank account’, a ‘designated client bank account’ or a ‘designated client fund account’. The firm may also be required to transfer client money to a third party such as an exchange, a clearing house or an OTC counterparty to meet a client’s obligation to provide collateral for a client transaction. Client money that has been transferred to a third party is also required to be segregated from the firm’s own money by the third party.
Where a firm holds client money in a general client account for its clients as a common pool of money, 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.
Where a firm holds client money in a designated client account or a designated client fund account for those clients that requested their client money be part of a specific pool of money, those particular clients will 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 such as the special administration of MFG UK triggers a notional pooling of all the client money, in every type of client money account held, and the obligation to distribute it.
Pooling and Distribution:
If a primary pooling event occurs:
In practice distribution (in whole or in part) can only occur once the firm (under the control of its administrator/special administrator/liquidator) has gained effective control of the client monies – following an insolvency of the firm such monies are typically retained by the relevant bank or third party collateral-holder referred to above until they are satisfied that (i) the funds are segregated; and (ii) there are no other claims to be off-set against them.
If a client is not able to be repaid his relevant claim in full from the segregated pool that client will have a claim for any shortfall against the assets of the firm’s own estate as an ordinary unsecured creditor of that firm.
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