Recent Developments Highlight the Importance of the CASS Resolution Pack


The FSA regards the protection of client money and assets (CASS) as one of the fundamental issues facing the financial services industry.  The failure of Lehman Brothers and MF Global served only to force the subject of CASS compliance yet higher up the FSA’s list of priorities.  Two recent events have brought CASS issues back into the news and highlighted the importance of creating a robust and scalable solution to the issue of CASS Resolution Pack (CASS RP) maintenance, as well as the role which the CASS RP can play in ensuring general CASS compliance.

CP12/22: Client assets regime

On 6 September 2012, the FSA published CP12/22, a combined Consultation Paper and Discussion Paper on changes to the CASS regime necessary to comply with the segregation and porting requirements of EMIR as well as the wider review of the CASS regime which is currently under way.

Under current CASS rules, the failure of a firm triggers a “primary pooling event”, following which all client money held by that firm is pooled pending distribution.  In an effort to comply with the requirements of Article 48 of EMIR, which requires segregation of client assets so as to facilitate porting, the FSA intends to allow firms to operate multiple legally and operationally separate client money pools and sub-pools.  In the event of insolvency, each pool would be distributed rateably to its particular beneficiaries.  All client money not held in a pool would form part of a general client money pool, in accordance with current CASS rules.

The FSA believes that multiple pools would allow firms to insulate clients from other clients with a greater risk appetite, or from the risks associated with more complex business lines.  As such, clients could be protected from exposure to delays in the return of client money and the potential for shortfalls in the general client money pool.

It is intended that there should be a great amount of flexibility in the way in which the pools are created.  So, for example, a firm could establish pools by reference to a business unit, such as Prime Brokerage.  Alternatively, a clearing member could operate separate pools of client money comprising (i) the margin held for a client in a client account at a CCP, and (ii) the client money held for that client by the clearing member itself.  If the clearing member subsequently became insolvent, the pooling would allow an insolvency practitioner to make the margin held by the clearing member available in order to facilitate porting.

BlackRock Fined for Breaches of CASS Rules

On 11 September 2012, the FSA published a final notice relating to the £9,533,1000 fine it had imposed on BlackRock Investment Management (UK) Ltd for failure to adequately protect client money in the period between October 2006 and March 2010.  This fine included a 30% discount for early settlement by BlackRock.

The specific failings of BlackRock related to the requirement to provide notification and obtain acknowledge of the trust status of client money placed on deposit.  The net result was that an average daily balance of approximately £1.36 billion had been at risk with the banks at which deposits had been made.


It is anticipated that the pooling arrangements proposed within CP12/22 will be finalised early in 2013.  Thereafter, it is expected that there will be a strong demand for segregated pooling from clients.  A rapid and large increase in the number of client money pools implies a degree of cost and administrative burden on firms providing this service due to the fact that they will be required to ensure that the segregation provisions of CASS 7.4 and the record keeping and reconciliation (both internal and external) requirements of CASS 7.6 apply to the general pool and to each sub-pool created.  Given that these requirements also track into a firm’s CASS RP, and the aggressive deadlines which apply to the updating of the information contained within a CASS RP, it is important to implement a robust and scalable solution to the initial form of a CASS RP and ensure that an appropriate amount of resource is committed to its maintenance.

The FSA press release accompanying the publication of the BlackRock fine reiterated that the identification and protection of client money should be at the top of every firm’s agenda.  In this regard, a CASS RP represents both a risk and a benefit to firms.  Risk arises from the fact that a CASS RP provides a convenient snap-shot of the state of a firm’s CASS compliance, which can be requested by the FSA at any time.  As such, in future, it will become far easier for the FSA to identify failings such as those affecting BlackRock and levy fines accordingly.  However, benefits arise if firms view the CASS RP as an internal risk management tool, highlighting areas of weakness or non-compliance with respect to CASS issues.  Being relatively self-contained, the CASS RP regulations are fairly easy to implement and yet provide good protection with respect to both client assets and a firm’s reputation.  In an environment of shrinking budgets, it is tempting to view the CASS RP as being of secondary importance.  However, if the BlackRock affair highlights anything, it is the price that can be paid for failing to heed the repeated warnings of the FSA regarding the importance of client money issues and the need to implement robust procedures with respect to all aspects of the client money process.

BBA Seeks Clarification on CASS RP from FSA

On 3 September 2012, the British Bankers’ Association (“BBA”) published a letter to the Client Assets Unit of the FSA seeking clarification with respect to several sections of the recently finalised CASS Resolution Pack rules contained within Chapter 10 of the FSA’s Client Assets Sourcebook, specifically:

  • CASS 10.3.1(11): Retail and Professional Agreements – whether a firm is permitted to include in its CASS RP only those agreements relating to clients where money or assets are actually held, or alternatively whether all agreements for all investment business clients should be included within the CASS RP;
  •  CASS 10.1.16R: FSA Notification – whether there is some concept of ‘materiality’ behind the requirement to notify the FSA immediately if a firm has not complied with, or is unable to comply with, the requirement to maintain and be able to retrieve a CASS Resolution Pack, or alternatively whether all breaches, no matter how small, must be notified to the FSA;
  • CASS 10.1.9E(2): Reliance on CASS Systems – under this rule, firms are obliged to put in place arrangements to ensure that systems upon which the firm is reliant for the performance of its CASS RP obligations remain operational and accessible after insolvency.  Noting the difficulty in securing the legal enforceability of this type of clause, the BBA asks for clarification as to whether a firm can instead rely on Section 14 of the Investment Bank Special Administration Regulations 2011 on Continuity of Supply, which obliges suppliers of key services to continue to supply those services to the administrator of a firm;
  • CASS 10.1.11R(2): Correction of Inaccuracies – this rule requires correction of inaccuracies within a CASS RP within 5 business days of the inaccuracy occurring.  The BBA seeks clarification as to whether the reference in the regulations to “material” implies that the FSA is only concerned with the correction of errors or mistakes, or alternatively whether it requires prompt updating of the entire CASS RP.  The BBA also seeks guidance on what is to be considered “material”, and an explanation of why 5 business days has been chosen as the applicable updating period instead of “…a more workable ‘monthly’ basis…”;
  • CASS 10.2.1R(3): Representatives and Agents – this rule requires the firm to identify each appointed representative, tied agent, field representative or other agent of the firm which receives client money or safe custody assets.  The BBA is seeking clarification of what is meant by “other agents”; and
  • CASS 10.2.1(6): CASS RP Affiliates and Third Parties – this rule requires a firm to identify group members and third parties “involved in operational functions relating to any obligations imposed on the firm under CASS 6 or CASS 7”.  The BBA is seeking clarification with respect to the meaning of the phrase “…operational functions…” together with examples of the types of third parties to which the regulation would apply.

FSA Consults on CASS Resolution Packs for Insurance Intermediaries

On 28 August, the FSA published Consultation Paper CP12/10, “Review of the client money rules for insurance intermediaries”.

The Consultation Paper is aimed at all insurance intermediaries to which CASS 5 applies.  It attempts to address a number of concerns which arose during the FSA’s review of CASS 5, including:

  • inappropriate controls around the use of non-statutory trusts;
  • ineffective risk transfer documentation;
  • infrequent client money calculations; and
  • the segregation of client money.

As part of its Consultation Paper, the FSA proposes to introduce the “CASS 5 Resolution Pack”.  The FSA estimates that there are approximately 3,000 firms in the UK which operate with permission to hold client money.  These will be the firms most affected by the CASS 5 Resolution Pack proposals.  The proposal itself largely mirrors the CASS Resolution Pack requirements for firms which are subject to CASS 6 (custody rules) and/or CASS 7 (client money rules) as detailed in Policy Statement PS 12/6 published by the FSA in March 2012 (see blogpost “FSA Policy Statement on CASS Resolution Packs” dated 28 March 2012).  However, there are a few notable differences, such as the absence of:

  • an express right to exhibit documentation in the CASS RP of an affiliate[1];
  • an express right to exhibit documentation in electronic form[2];
  • a requirement to ensure that any systems for the provision of component documents within the CASS RP remain operational and accessible after the insolvency of the firm[3]; and
  • a requirement for the firm to provide information with respect to the affiliates and third parties on which it is dependent for the performance of its CASS obligations[4].

The purpose of the CASS 5 Resolution Pack is to assist an insolvency practitioner access information required to deal with client money in a timely manner.  It is proposed that insurance intermediaries must, at all times, be able to provide the documentation specified in the schedule below to an insolvency practitioner within 48 hours of the firm’s failure.

CASS 5 Resolution Packs must be reviewed on an ongoing basis to ensure that they remain accurate, and any material inaccuracies must be corrected within 5 business days of the inaccuracy occurring.  The firm must notify the FSA immediately if it is not able to comply with these requirements.

In practice, updating of a CASS 5 Resolution Pack is likely to represent less of a burden than is the case with respect to a ‘normal’ CASS Resolution Pack.  This is due to the fact that the documentation to be incorporated within the CASS 5 Resolution Pack is more static in nature.  Nonetheless, the FSA proposes to change the frequency with which client money calculations must be performed, from the current once every 25 business day period to:

  • where the firm holds client money under a non-statutory trust:
    • at least every 7 business days if the firm held more than GBP 250,000 of client money at any time during the calendar year prior to the year the calculation is made; or
    • at least every 14 business days if the firm held less than or equal to GBP 250,000 of client money at any time during the calendar year prior to the year the calculation is made; and
    • at least every 25 business days where the firm holds client money under a statutory trust.

As each firm to which the CASS 5 Resolution Pack rules apply is obliged to include the latest client money calculation and reconciliation within its pack, a degree of effort to maintain the CASS 5 Resolution Pack remains.

The Consultation Paper is open for comments until 30 November 2012.  The FSA expects to publish its feedback to the consultation, together with final rules, in the second quarter of 2013.  It seems likely that the rules themselves will not come into force until 12 months from the publication of the final rules for all provisions (except for separate proposals regarding unclaimed client money).



  • a master document containing information sufficient to retrieve each document in the firm’s CASS resolution pack;
  • a document identifying all the institutions with which client money may be held, including approved banks, money market funds or other third parties to whom client money may be passed;
  • a document identifying each appointed representative, field representative or other agent of the firm which may receive client money in its capacity as the firm’s agent;
  • a document identifying each senior manager and director and any other individual and the nature of their responsibility within the firm who is critical or important to the performance of operational functions related to any of the obligations imposed on the firm under CASS 5;
  • for the institutions identified in (2) all trust letters;
  • the latest client money calculation;
  • the latest bank reconciliation;
  • a copy of the firm’s annual reconciliation down to individual client balances; and
  • any Non-Statutory Trust deeds.

[1] See CASS 10.1.6R

[2] See CASS 10.1.13G

[3] See CASS 10.1.9E(2)

[4] See CASS 10.2.1(6)

Resolution Planning: Identifying “non-standard terms” in Derivative Documentation


Feedback Statement 12/1 (“FS 12/1”), published by the FSA in May 2012, provides detailed guidance to firms which are subject to the UK’s recovery and resolution planning rules.  In general, FS 12/1 is a superb roadmap document, assisting firms through the detailed data requirements which form the core of recovery and resolution planning.  Unfortunately, there remain a number of areas of FS 12/1 in which clarity is lacking.  One such area appears in the context of Module 3.7 (“Derivatives / Securities Financing”), which forms part of the ‘Group structure & key legal entity information’ section.

Module 3.7

Module 3.7 requires firms to provide information with respect to their derivatives exposures.  Exposures are to be split into three broad categories, being:

  • Exchange traded derivatives;
  • OTC but centrally cleared derivatives; and
  • OTC bilateral derivatives.

Within each category, detailed reporting is required in four main areas:

  • Counterparty details;
  • Exposure data;
  • Collateral data; and
  • Documentation.

Within the “Documentation” section, firms must provide, inter alia, information regarding “non-standard terms”.  Rather unhelpfully, the summary provided by the FSA to explain the background to the data requirement states simply that its purpose is to “determine requirements regarding trade termination etc”.  However, on the plus side, two examples of a “non-standard term” are provided, being:

  • Events of default, and
  • Cross-default clauses.

No other information is provided to assist firms with their submissions.  Additional FSA guidance was expected on 13 August 2012, but this seems unlikely to address this particular issue.  Consequently, many firms, particularly those with large portfolios of derivative documentation, have been left struggling to understand where to draw the line.

Unfortunately, there is no single correct answer to this question.  Nonetheless, it would seem possible to identify two general principles which will assist with the identification of “non-standard terms” in derivative documentation.  I would suggest that these principles are that:

  • an objective, rather than a subjective, measure of what is “non-standard” is appropriate; and
  • clauses should only be regarded as “non-standard” to the extent that they could:
    • have an adverse effect on the application of a resolution tool; or
    • constitute a barrier to resolution.

An objective measure of what is “non-standard”

ISDA negotiation practices have converged significantly over recent years on a number of issues with the result that it is possible to discern a number of ‘industry standard’ positions.  As such, the ISDA negotiation policy of a firm will often represent a good starting place to assist in understanding what can be regarded as ‘standard’.  Clauses in executed documentation which lie outside of an agreed negotiation policy should raise internal flags and merit further investigation.  Inevitably, however, this exercise is of limited assistance as it represents a firm’s subjective view of its own risk tolerance.  Despite the fact that recovery and resolution planning remains a very firm-specific exercise, if assessments of resolvability and the contents of resolution plans are to be meaningful and consistent across EU Member States, a truly objective benchmark is required.  An assessment of the effect of a contractual clause on the ultimate resolvability of a firm creates this objective standard.

“Non-standard” clauses must affect resolvability

The power to transfer, modify or cancel contractual arrangements entered into by a firm under resolution form the essence of the Resolution Powers conferred on resolution authorities pursuant to the draft RRP Directive.  Accordingly, in assessing whether a contractual provision could have an adverse effect on the resolvability of a firm or the application of a resolution tool, one should be primarily concerned with the ability of a resolution authority to transfer or terminate a derivatives transaction so as to help facilitate an orderly wind-down of the firm in question.

Towards defining a set of “non-standard” terms

With this in mind, it is possible to group contractual provisions into three main categories:

  • Probable Non-Standard Terms;
  • Possible Non-Standard Terms; and
  • Unlikely to be Non-Standard Terms.

The Schedule below applies the principals set out above to a number of clauses of the type typically found in derivatives documentation in order to generate the groupings referred to above.  However, it is important to recognise that, whilst an assessment of the effect of a contractual provision on the resolvability of a firm helps to create an objective benchmark regarding what is “standard”, the exact positioning of this benchmark will inevitably change over time.  What could be regarded as a “standard” provision, say, 5 years ago may well not be standard today.  Similarly, what is standard today may not be standard in another 5 years time.  As such, this aspect of recovery and resolution planning must be kept under periodic review.


 Group 1: Probable Non-Standard Terms



Events of Default

Specifically referred to in FS 12/1

Cross-default / Cross-acceleration

Specifically referred to in FS 12/1

Termination Rights Generally

Termination rights should be regarded in the same light as Events of Default 

Ratings Downgrade Clause

Often takes the form of an Event of Default / Additional Termination Event

Material Adverse Change Clause

Often takes the form of an Event of Default / Additional Termination Event

Credit Event Upon Merger linked to specific ratings or other factors

CEUM is a Termination Event under a standard ISDA Master Agreement

Unusual Governing Law


Effective application of resolution tools may be more difficult/impossible in certain jurisdictions which do not recognise the powers of resolution authorities


Group 2: Possible Non-Standard Terms



Undisclosed Agency Arrangements

May make application of the resolution tools more difficult as the identity of the counterparty may be difficult to ascertain



Should not of itself prevent exercise of a resolution tool but may still constitute a barrier to resolution if indemnities are enforced

Illiquid CSA Collateral


Should not of itself prevent exercise of a resolution tool but may still constitute a barrier to resolution in terms of transferring or terminating transactions

ISDA First Method

Should not of itself prevent exercise of a resolution tool but may still constitute a barrier to resolution if a counterparty has a right to ‘walk away’ without making payment

Ratings Dependent CSA Credit Support Amounts

Should not of itself prevent exercise of a resolution tool but may still constitute a barrier to resolution if additional collateral must be posted

Unusually wide definition of “Specified Entities”

Widens the application of ISDA Events of Default and/or Termination Events


Group 3: Unlikely to be Non-Standard Terms



Automatic Early Termination

AET is primarily designed to protect against ‘cherry picking’.  However, in certain circumstances the automatic termination of trades could constitute a barrier to resolution.  Nonetheless, it is placed in Group 3 due to the fact that, under normal circumstances, resolution tools would have been implemented before insolvency (and therefore AET) occurs

Non-daily CSA calls


Should not be effective to prevent the exercise of the resolution tools

Non-zero/large CSA Thresholds/MTAs

Should not be effective to prevent the exercise of the resolution tools

Unusually large/small collateral haircuts

Should not be effective to prevent the exercise of the resolution tools

Non-assignment Provisions

Should not be effective to prevent the exercise of the resolution tools


CASS Resolution Pack Requirements Unaffected by FSA CASS Consultation Paper

On 25 July 2012, the FSA published consultation paper CP 12/15 on “Client Assets Firm Classification, Oversight, Reporting and the Mandate Rules”.  CP 12/15 is open for comment until 30 September 2012, and consults on possible changes in the following areas:

  • CASS firm classification and operational oversight:
    • clarifying that firms which only arrange safeguarding and administration of assets do not fall within the scope of CASS 1A;
    • clarifying the date on which a firm becomes a CASS firm for the firm time or when it changes CASS categories;
    • proposing changes to the procedure whereby a CASS small firm can opt to be treated as a CASS medium firm and a CASS medium firm can opt to be treated as a CASS large firm;
    • Client money and assets return (“CMAR”):
      • proposing amendments to the CMAR template regarding holding of safe custody assets and client money balances; and
      • Clarifying the scope of the mandate rules in CASS 8, confirming that the rules do not apply to:
        • a firm in relation to client money held by that firm in accordance with CASS 5 or CASS 7, or client money assets held by that firm in accordance with CASS 6; or
        • an operator of a regulated collective investment scheme, in relation to activities carried on for the purpose, or in connection with, the operation of the scheme.

Fortunately, for those affected by CASS matters, the changes do not impact on the informational requirements forming part of the CASS Resolution Pack initiative, or the creation/maintenance of a CASS Resolution Pack more generally.  The deadline for submission of a first CASS Resolution Pack remains as 1 October 2012.

Seminar on Preparing a Recovery and Resolution Plan

On 13 July 2012, DRS, together with SNR Denton, will be presenting a half-day workshop on the law and practice relating to Living Wills at the British Bankers’ Association headquarters in London.  The latest regulatory guidance on RRP will be discussed, including:

  • The FSB’s “Key Attributes of Effective Resolution Regimes for Financial Institutions” Discussion Paper;
  • The FSA’s Feedback Statement 12/1;
  • The EBA Discussion Paper on a Template for Recovery Plans; and
  • The draft EU Directive Establishing a Framework for the Recovery and Resolution of Credit Institutions.

Specifically, we will be suggesting a template for a recovery plan and discussing some of the practical issues currently facing market participants in completing their RRP submissions as well as some possible solutions.

More information about the event and an online registration form are available here.

Please join us if you can.  If you aren’t able to attend on the day but are nonetheless interested in the subject, just let me know and we’d be happy to make alternative arrangements.  My contact details are on the “About” page of this blog.

Webinar on CASS Resolution Packs Now Available to Watch Online

If you have an interest in Cass Resolution Packs and missed the Webinar which took place on 21 June with Derivsource, a video of the presentation is now online and available here.

The presentation provides a brief background to CASS RP and summarises the law in this area before explaining in detail the practicalities and challenges of creating a CASS Resolution Pack.  Template Cass Resolution Packs in MS Word and MS Excel are both shown, together with an online demonstration of a bespoke CASS RP database (for information on this, please see our CASS RP website).