• COBS 14.4 COBS 14.4 Client Money Distribution Rules

    • COBS 14.4.1 COBS 14.4.1 Application

      (a) To the extent that the rules in this section ("the Client Money Distribution Rules") are inconsistent with section 233 of the Insolvency Regulations, these Rules will prevail.
      (b) This chapter applies to an Authorised Person that holds Client Money which is subject to the Client Money rules when a Pooling Event occurs.

      • Guidance

        1. This section seeks to facilitate the timely return of Client Money to Clients or Relevant Money to Payment Service Users, as applicable, in the event of the Failure of an Authorised Person or third party at which the Authorised Person holds Client Money or Relevant Money, as applicable.
        2. Following a Pooling Event, an Authorised Person must sell all non-cash assets representing the proceeds of, or directly traceable from, Client Money and use the proceeds of the sale to satisfy claims of Statutory Trust beneficiaries made in accordance with this chapter.
        3. Relevant Money held by an Authorised Person conducting Payment Services is intended to be treated in the same manner as Client Money pursuant to the Client Money Distribution Rules, in terms of its segregation for the purposes of distribution to Payment Service Users following a Primary Pooling Event or a Secondary Pooling Event. Distribution of Relevant Money subject to a Statutory Trust is intended to occur either in accordance with the balances in the respective Payment Accounts of Payment Service Users, or alternatively to be used for the purpose of redemption of Stored Value held by Payment Service Users.

    • COBS 14.4.2 COBS 14.4.2 Primary Pooling Events

      (a) If the Authorised Person becomes insolvent, and there is (for whatever reason) a shortfall in Client Money or Relevant Money, as applicable, in a particular Statutory Trust, the available funds will be distributed in accordance with the Client Money Distribution Rules.
      (b) A Primary Pooling Event occurs:
      (i) on the Failure of an Authorised Person;
      (ii) on the vesting of assets in a trustee in accordance with an Assets Requirement imposed under section 38 of FSMR; or
      (iii) if the Regulator makes an order or decision to this effect under FSMR;
      (iv) when the Authorised Person notifies, or is in breach of its duty to notify, the Regulator, in accordance with Rules 14.2.12(i), 14.2.19, 14.3.7, 15.9.5 and 16.2.15 that it is unable correctly to identify and allocate in its records all valid claims arising as a result of a Secondary Pooling Event.
      (c) Rule (b)(iv) does not apply so long as:
      (i) the Authorised Person is taking steps, in consultation with the Regulator, to establish those records; and
      (ii) there are reasonable grounds to conclude that the records will be capable of rectification within a reasonable period.

      • Guidance

        A Primary Pooling Event triggers a notional pooling of all the Client Money or Relevant Money, as applicable, in every type of Client Account, and the obligation to distribute it.

    • COBS 14.4.3 COBS 14.4.3 Pooling and distribution

      (a) If a Primary Pooling Event occurs, an Authorised Person must comply with (b) to (g) below.
      (b) The following Client Money is included in a separate Statutory Trust under Rule 14.2.14(d):
      (i) the Authorised Person's receivables in respect of any Client Money held in a Client Account of the Authorised Person relating to that separate Statutory Trust; and
      (ii) the Authorised Person's receivables in respect of any Client Money held in a Client Account of the Authorised Person relating to that separate Statutory Trust, except in respect of Client Money held in a Client Account at a Recognised Clearing House, a Remote Clearing House or a Clearing Member which is, in either case, held as part of a Clearing Member Client Contract under FSMR;
      (c) In respect of the general Statutory Trust (i.e., the Statutory Trust in respect of the general pool of Client Money held for all Clients of the Authorised Person or held for residual Clients not interested in a Designated Client Account, Designated Client Fund Account or specific Statutory Trust under Rule 14.2.14), the following is treated as a single notional pool of Client Money for the beneficiaries of the general pool:
      (i) the Authorised Person's receivables in respect of any Client Money held in any Client Account of the Authorised Person;
      (ii) the Authorised Person's receivables in respect of any Client Money held in a Client Account of the Authorised Person, except for Client Money held in a Client Account at a Recognised Clearing House or Remote Clearing House, or a Clearing House which is, in either case, held as part of a Clearing Member Client Contract under FSMR; and
      (iii) the Authorised Person's receivables in respect of any Client Money identifiable in any other account held by the Authorised Person into which Client Money has been received;
      except, in each case, for Client Money relating to a separate Statutory Trust which falls under (b).
      (d) The Authorised Person must:
      (i) distribute Client Money in accordance with Rule 14.2.15, so that each Client who is a beneficiary of each separate Statutory Trust receives a sum which is rateable to the Client Money entitlement and calculated in accordance with Rule 14.4.3(n) relating to each Client's Client Equity Balance; or
      (ii) (where applicable) transfer Client Money held at a Recognised Clearing House, Remote Clearing House or Non-ADGM Clearing House to effect or facilitate porting of positions held for the Clients who are beneficiaries of that separate Statutory Trust.
      (e) If, in connection with a Clearing Member Client Contract, Client Money is remitted directly to the Authorised Person from a Recognised Clearing House, a Remote Clearing House or from a Clearing Member thereof, then:
      (i) any such remittance in respect of a Client Account constituting a separate Statutory Trust under Rule 14.2.15 must be distributed to the relevant Client interested in such Client Account subject to Rule 14.2.15(d); and
      (ii) subject to (i), any such remittance in respect of any other Client Account must form part of the relevant Statutory Trust under (b) and be subject to distribution accordingly.
      (f) Where any Asset is valued by a Recognised Clearing House, the close-out price or valuation of the Recognised Clearing House shall apply on a Pooling Event, regardless of the actual time of close-out, provided that the Recognised Clearing House or Remote Clearing House has acted in accordance with its Default Rules.
      (g) [Deleted]
      (h) Where an Authorised Person that is a Clearing Member of a Recognised Clearing House or Remote Clearing House defaults, the Recognised Clearing House or Remote Clearing House may:
      (i) port Client positions and related collateral (including proceeds of Client Money or Safe Custody Assets) where possible; and
      (ii) after the completion of the default management process:
      (A) return any balance due directly to those Clients for whom the positions are held, if they are known to the Recognised Clearing House or Remote Clearing House; or
      (B) remit any balance to the Authorised Person for the account of its Clients if the Clients are not known to the Recognised Clearing House or Remote Clearing House.
      (i) Where an Authorised Person acting in connection with a Clearing Member Client Contract for a Client (who is also an indirect Client) defaults, the Clearing Member with whom the Authorised Person has placed Client Moneyof the indirect Client, may:
      (i) transfer the positions and assets either to another Clearing Member of the relevant Recognised Clearing House or Remote Clearing House, or to another Authorised Person willing to act for the indirect Client; or
      (ii) liquidate the Assets and positions of the indirect Clients and remit all monies due to the indirect Clients.
      (j) Where any balance remitted from a Recognised Clearing House or Remote Clearing House (or in the case of the Authorised Person being an indirect Client, a Clearing Member) to an Authorised Person is Client Money, (k) provides for the distribution of remittances from either an Individual Client Account or an Omnibus Client Account.
      (k) Remittances received by the Authorised Person falling within (e) should not be pooled with Client Money held in any Client Account operated by the Authorised Person at the time of the Primary Pooling Event. Those remittances should be segregated and promptly distributed to each Client on whose behalf the remittance was received.
      (l) [Deleted]
      (m) [Deleted]
      (n) Each Client's Client Equity Balance must be reduced by:
      (i) any amount paid by:
      (A) a Clearing House to a Clearing Member other than the Authorised Person in connection with a porting arrangement where Client Money is ported by the Recognised Clearing House or Remote Clearing House as part of the default management process of that Recognised Clearing House or Remote Clearing House;
      (B) a Clearing Member to another Clearing Member or Authorised Person (other than the Authorised Person) in connection with a Clearing Member Client Contract where Client Money is paid to the Client or a duly authorised representative of the Client;
      (ii) any amount paid by:
      (A) a Recognised Clearing House or Remote Clearing House directly to that Client, where the amount comprises the balance owed by the Recognised Clearing House or Remote Clearing House after the completion of the Clearing Member's default management process by the Recognised Clearing House or Remote Clearing House; and
      (B) a Clearing Member directly to an indirect Client in accordance with default management procedures adopted by the Clearing Member.
      (iii) any amount that must be distributed to that Client by the Authorised Person in accordance with(e)(i) and (ii).
      (o) When, in respect of a Client who is a beneficiary of a Statutory Trust, there is a positive individual Client balance and a negative Client Equity Balance in relation to that Statutory Trust, the credit for that Statutory Trust must be offset against the debit reducing the individual Client balance for that Client.
      (p) When, in respect of a Client who is a beneficiary of a Statutory Trust, there is a negative individual Client Equity Balance and a positive Client Equity Balance in relation to that Statutory Trust, the credit for that Statutory Trust must be offset against the debit for that Statutory Trust reducing the Client Equity Balance for that Client.

      • COBS 14.4.3 Guidance

        1. For the avoidance of doubt, 'relevant Clients' in the case of (e) includes any entitlement of a Client held by it for a Person who is an indirect client.
        2. For the avoidance of doubt, in respect of a Clearing Member Client Contract, any Client Money remitted by the Recognised Clearing House or Remote Clearing House (or in the case of the Authorised Person being an indirect Client, a Clearing Member) to the Authorised Person pursuant to (e) should not be treated as Client Money received after the Failure of the Authorised Person under Rule 14.4.4.
        3. The Authorised Person's obligation to its Client in respect of Client Money relating to a particular Statutory Trust is discharged where the Authorised Person, to facilitate porting transfers, or the transfer of that Client Money to a Clearing Member in connection with a Clearing Member Client Contract and the Clearing Member, remits payment to another Authorised Person or to another Clearing Member where the Client Money is paid to the Client or a duly authorised representative of the Client.

    • COBS 14.4.4 COBS 14.4.4 Client money received after the Failure of the Authorised Person

      (a) Subject to Rule 14.4.3, Client Money received by the Authorised Person after a Primary Pooling Event in respect of a Statutory Trust must not be pooled with Client Money held in any Client Account operated by the Authorised Person either in respect of that Statutory Trust or any other Statutory Trust at the time of the Primary Pooling Event. Such Client Money must instead be placed in a Client Account that has been opened after that event and must be handled in accordance with the requirements in Rule 14.2, and returned to the relevant Client(s) without delay, except to the extent that:
      (i) it is Client Money relating to a transaction that has not settled at the time of the Primary Pooling Event; or
      (ii) it is Client Money relating to a Client, for whom the Client Equity Balance, calculated in accordance with Rules 14.4.3(n), 14.4.3(o) and 14.4.3(p), shows that Money is due from the Client to the Authorised Person at the time of the Primary Pooling Event.
      (b) [Deleted]
      (c) If an Authorised Person receives a mixed remittance after a Primary Pooling Event, it must:
      (i) pay the full sum into the separate Client Account opened in accordance with (a); and
      (ii) pay the money that is not Client Money out of that Client Account into an Authorised Person's own account within one Business Day of the day on which the Authorised Person would normally expect the remittance to be cleared.
      (d) Whenever possible the Authorised Person should seek to split a mixed remittance before the relevant accounts are credited.
      (e) If both a Primary Pooling Event and a Secondary Pooling Event occur, the provisions of this section relating to a Primary Pooling Event apply.

      • Guidance

        Client Money received after the Primary Pooling Event relating to an unsettled transaction should be used to settle that transaction. Examples of such transactions include:
        (i) an equity transaction with a trade date before the date of the Primary Pooling Event and a settlement date after the date of the Primary Pooling Event; or
        (ii) a contingent liability investment that is 'open' at the time of the Primary Pooling Event and is due to settle after the Primary Pooling Event.

    • COBS 14.4.5 COBS 14.4.5 Secondary Pooling Events

      (a) A Secondary Pooling Event occurs on Failure of a third party to which Client Money or Relevant Money, as applicable, held by the Authorised Person has been transferred under Rule 14.2.5(a) or Rule 14.2.9 and the Authorised Person has not repaid to its Clients or Payment Service Users, or paid into a Client Account at an unaffected bank, an amount equivalent to the shortfall in the amount of Client Money or Relevant Money, as applicable, held by the third party.
      (b) The Authorised Person would be expected to reflect the shortfall in (a) in itsrecords of the entitlement of Clients and of Client Money, or Payment Service Users and Relevant Money, as applicable, held with third parties under Rules 14.2.18, 14.3.6 and 14.3.7.

      • Guidance

        1. These Rules in relation to Secondary Pooling Events seek to ensure that Clients who have previously specified that their Client Money be placed in a Designated Client Account at a different bank, should not suffer the loss of a different bank that has Failed.
        2. When Client Money is transferred to a third party, an Authorised Person continues to owe fiduciary duties to the Client. Whether an Authorised Person is liable for a shortfall in Client Money caused by the Failure of a third party will depend on whether it has complied with its duty of care as agent or trustee.

    • COBS 14.4.6 Failure of third parties: pooling and distribution

      (a) This section applies to third parties, which includes:
      (i) a bank (where one or more general Client Accounts are held under one or more Statutory Trusts or separate Statutory Trusts); and
      (ii) an intermediate broker, settlement agent or OTC counterparty.
      (b) If a Secondary Pooling Event occurs as a result of the Failure of such a third party where one or more Client Accounts are held under different Statutory Trusts, then:
      (i) in relation to every Client Account of the Authorised Person maintained in respect of a particular Statutory Trust, Rule 14.4.7 will apply.
      (c) Money held in each general Client Account of the Authorised Person under a Statutory Trust or separate Statutory Trusts must be treated as pooled into a single Statutory Trust ("the relevant pool") and:
      (i) any shortfall in Client Money or Relevant Money held, or which should have been held in the general Client Accounts for the relevant pool, that has arisen as a result of the Failure of the third party, must be borne by all the Clients or Payment Service Users, as applicable, of that relevant pool, rateably in accordance with their entitlements;
      (ii) a new Client Money or Relevant Money entitlement, as applicable, must be calculated for each Client or Payment Service User, as applicable, of the relevant pool to reflect the requirements in (i), and the Authorised Person's records must be amended to reflect the reduced Client Money or Relevant Money entitlement;
      (iii) the Authorised Person must make and retain a record of each Client's or Payment Service User’s share of the shortfall of Client Money or Relevant Money, as applicable, at the Failed third party until the Client or Payment Service User, as applicable, is repaid; and
      (iv) the Authorised Person must use the new Client Money or Relevant Money entitlements, calculated in accordance with (ii), for the purposes of reconciliations pursuant to Rules 14.2.12(a) to 14.2.12(d) for the relevant Clients in (ii).
      (d) The term "which should have been held" is a reference to the Failed third party's Failure to hold the Client Money or Relevant Money, as applicable, at the time of the Pooling Event.
      (e) Any Client Money held under a particular Statutory Trust, in relation to a Designated Client Account at a third party (other than the Failed third party) is not pooled with any other Client Money held in that particular Statutory Trust or any other Statutory Trusts.
      (f) Any Client Money held under a Statutory Trust, no part of which is at the Failed third party, is not pooled with any Client Money of other affected Statutory Trusts.
      (g) [Deleted]
      (h) Any shortfall in Client Money or Relevant Money held under a particular Statutory Trust affected by a Secondary Pooling Event must be borne by all the Clients or Payment Service Users whose Client Money or Relevant Money, as applicable, is held in such a Statutory Trust, rateably in accordance with their Client Money or Relevant Money entitlements.
      (i) A new Client Money or Relevant Money entitlement, as applicable, must be accordingly and the Authorised Person's records must be amended to reflect each Client's or Payment Service User’s new Client Money or Relevant Money entitlement, as applicable.
      (j) the Authorised Person must make and retain a record of each Client's or Payment Service User’s share of the Client Money or Relevant Money shortfall at the Failed third party until the Client or Payment Service Useris repaid; and
      (k) the Authorised Person must use the new Client Money or Relevant Money entitlements, calculated in accordance with (h), for the purposes of reconciliations pursuant to Rules 14.2.12(a) to 14.2.12(d) for the relevant Statutory Trust(s).
      (l) A Client whose Money was held, or which should have been held, in a Designated Client Account or Designated Client Fund with a Failed third party is not entitled to claim in respect of that Money against any other Client Account of the Authorised Person.

    • COBS 14.4.7 Client Money received after the Failure of a third party

      (a) Client Money or Relevant Money received by the Authorised Person after the Failure of a third party, that would otherwise have been paid into a Client Account at that Failed third party:
      (i) must, if Client Money, not be transferred to the Failed third party unless specifically instructed by the Client in order to settle an obligation of that Client to the Failed third party; and
      (ii) must, if Client Money, be, subject to (i), placed in a separate Client Account:
      (A) on the written instruction of the Client, transferred to a third party other than the one that has Failed; or
      (B) returned to the Client as soon as possible.
      (iii) must, if Relevant Money, be placed in a separate Client Account maintained with a third party other than the one which has Failed.
      (b) If an Authorised Person receives a mixed remittance after the Secondary Pooling Event which consists of Client Money that would have been paid into a Client Account, a Designated Client Account or a Designated Client Fund Account maintained at the third party that has Failed, it must:
      (i) pay the full sum into a Client Account other than one operated at the Failed third party; and
      (ii) pay the money that is not Client Money out of that Client Account within one Business Day of the day on which the Authorised Person would normally expect the remittance to be cleared.
      (c) Whenever possible the Authorised Person should seek to split a mixed remittance before the relevant accounts are credited.

    • COBS 14.4.8 Notification to the Regulator

      (a) On the Failure of a Third Party with which Client Money or Relevant Money is held, the Authorised Person must notify the Regulator:
      (i) as soon as it becomes aware of the Failure of any bank, intermediate broker, settlement agent, OTC counterparty or other entity with which it has placed, or to which it has passed, Client Money or Relevant Money; and
      (ii) as soon as reasonably practical, whether it intends to make good any shortfall that has arisen or may arise and of the amounts involved.