The UK Financial Services Authority (FSA) has recommended the introduction of the multiple client money pools in order to safeguard client margin held at a CCP. The regulators latest proposals, if adopted by the securities and investment industry, would usher in the most radical change that has been made to the client money and custody assets (collectively client assets) regime in over 20 years and would ensure compatibility with the European Market Infrastructure Regulation (EMIR), said the FSA.
Part one of the FSAs three-part proposal focuses on the key tenets of EMIR. Due to published in 2013, the EU regulation will require CCPs or clearing houses, in the event of the default of a clearing member, to try to port the positions and certain associated margin of the failed clearing members clients to a back-up clearing member or return any balance.
The introduction of EMIR will allow options on how to safeguard client margin held at the CCP. In part two of its proposals, the FSA proposes to go further than EMIR and bring in rules that extend similar options to all client money held by all firms in relation to investment business. This will be done by the introduction of the multiple client money pools.
Splitting client money into sub-pools provides a number of advantages, according to the FSA, including: restricting any client money shortfalls to a particular sub-pool, so that all the clients of a firm do not share all losses, thereby maximizing client money return for some clients; and allowing the distribution of client money from a particular sub-pool where no contentious issues have arisen in relation to that sub-pool, leading to a more rapid distribution of some client money.The FSA proposes to permit firms to create multiple client money sub-pools in relation to any investment business, with the discretion left to the firm and the clients to determine the basis. For example, a firm may wish to create a separate client money sub-pool for its prime brokerage business, separating it from other parts of business. Alternatively, a client may agree with a firm to have only its own client money held in a client money sub-pool, separate from all other clients money.
The sub-pools would offer different client protections and could result in a change to some custodians fee structures.
FSA spokesperson Joseph Eyre said: Were asking people for their thoughts on sub-pooling at this point and whether they might find the structure useful.
Richard Sutcliffe, FSAs client assets unit leader, said: The protection of client assets remains a key priority for the FSA and todays proposals will go a long way to ensure confidence in UK markets is maintained. In addition to the changes required by EMIR the FSA proposals will lead to the most radical change in the client assets regime in over 20 years with the introduction of client money sub-pools that are designed to bring further safeguards to the industry. Furthermore, the fundamental review of our client assets regime also invites debate on the changes required following the lessons learned from ongoing insolvencies.
In part three of its proposals, the FSA also provides an overview of the fundamental review of the client money and custody assets regime. The fundamental review is focused at improving the regime to lead to better results in the insolvency of a firm although it is important to recognize that insolvency law is determined by primary legislation and not the FSA rules. The objectives of the review are: improving the speed of return of client assets following the insolvency of an investment firm; reducing the market impact of an insolvency of an investment firm that holds client assets; and achieving a greater return of client assets to clients following an insolvency of an investment firm.
(JDC)