cass and tr - ed newman (sept 2015)

© 2015 Grant Thornton UK LLP. All rights reserved.

CASS and Transaction Reporting

Ed Newman

September 2015


Agenda

1. A - REMIT – due October 2015

2. B - MiFID II and MiFIR – due January 2017

3. C - EMIR Level 2 – due November 2015 (enhancement to what is already in place)

4. The current transaction reporting regime

5. Transaction reporting 2017

6. D - CASS – the code and PS 14/9

7. Q&A


A - REMIT

What is REMIT

and why does

it exist?


REMIT Introduction

• Regulation on Energy Market Integrity and Transparency (REMIT) is a

European Parliament and European Council regulation, introduced in 2011, to

assist national regulatory authorities to monitor the wholesale energy

markets. Currently, REMIT is preparing for the market to begin reporting their

energy transactions towards the end of 2015, much like EMIR or MiFID

reporting.

• The regulation advises relevant participants in the energy trading market on

how to register and report their trades.

• REMIT has 3 primary aims:

1. To deter energy market traders and participants from market abuse and

manipulating the market using inside information

2. To create and implement a market specific EU wide transaction monitoring

framework

3. To ensure the intentions of the regulation are appropriately monitored and

investigated by national regulatory authorities.


Who?

The scope of REMIT extends to the following (not exhaustive) list of persons, referred to

as 'market participants', who will therefore be affected by the reporting regulations:

- EU energy trading companies

- EU large energy consumers

- Investment firms

- Energy producers

- Transmission system operators (TSOs)

- Individual traders of relevant products (exceeding the threshold of 600GWh per

year)

The definition to use when determining ones status as a market participant is as follows:

'persons, including TSOs, who enter into transactions, including the placing of

orders to trade, in one or more wholesale energy markets'

(Article 2 (7) of REMIT)


What?

Those entities or people captured under the 'market participants' definition will need to

have registered with ACER (Agency for the Cooperation of Energy Regulators) by

June 2015, to begin reporting on 7 October 2015.

Any contract or trade for the supply or transportation of electricity and/or natural gas will

need to be reported – by both counterparties - on a T+1 basis to ACER as from the date

of execution or modification. These trades could be derivative trades, financial

derivatives trades, non-derivatives or energy orders and trades.

Data reporting requirements will include the following details in relation to each trade,

covering both trade data (ie lifecycle and pre/post trade information) and fundamental

data:

- date and time stamp (ISO 8601)

- identifying code (LEI, BIC, EIC)

- identifying code of counterparties and beneficiaries

- country code (ISO 2166)

- currency code (ISO 4217)

- parties/beneficiaries, price/quantity

- distinction of physical or financial settlement


Where?

As an EU legislation, REMIT is in force automatically

in all member states, and the investigation and

enforcement remains the responsibility of the

respective states. REMIT also extends to non-EU

branches of EU entities.

Each trade will need to be reported to

ACER via a Registered Reporting

Mechanism (RRM). The RRM will collate

data in order to report directly to ACER

(only RRMs are able to do this). RRMs

can conduct certain functions such as

trade matching as well as reporting, and

each market participant has a pool of

RRMs to choose from (currently 15).


When?

REMIT has been in force in the EU since 2011, and the deadline for registering

with ACER was in June 2015.

The go-live date for trade reporting is 7 October 2015, with back reporting

obligations beginning on 7 January 2016. The backloading requirement will

ensure that all energy contracts concluded before the reporting obligation

was live and remain outstanding on that date, must also be reported.


How?

Market participants are expected to register with ACER and begin

reporting, using the procedures laid out in TRUM (Transaction

Reporting User Manual) as published by ACER.

The timelines for reporting are T+1 – mirroring those of EMIR.

in accordance with a valid instruction


Why?

REMIT was implemented in the EU in 2011, however the Implementing Act

which refers to transaction reporting was published in December 2014. The

aim of the EU was to reduce market manipulation in energy markets, and

consequently created ACER as a governing body for monitoring purposes.

Ofgem is the UK's national regulatory authority, providing an investigatory

and disciplinary force on behalf of ACER and the EU government. Given the

similarity in intention to aspects of EMIR and MiFID II, and the overlap

between the regulations of certain derivative trades, Ofgem work closely with

the FCA to ensure a common approach.


B – MiFID and MiFIR

MiFID II and

MiFIR


MiFID II and MiFIR - Introduction

The Markets in Financial Instruments Directive (MiFID) is an EU law

regulating investment services across the states of the EEA. Its purpose is to

license investment services and apply market wide standards, with particular

drive coming from the detection and investigation of market abuse. MiFID

was introduced into the EU in 2007, and has been subsequently amended.

In light of the financial crisis of 2008, and the increasing focus on consumer

and investor protection, MiFID is being revised by ESMA and the

European Commission to level 2. As a result, MiFID II and MiFIR will be

effective and live in 2017.


Who?

The jurisdictional scope of MiFID II and MiFIR is EEA-wide. The introduction of MiFIR

as a regulation as opposed to a directive ensures there are no national differences in

implementation. All investment firms in this area are subject to requirements as

defined by ESMA.

The scope also includes credit firms (as defined by CRD IV) and banks. The only

exemptions are those investment managers who invest solely in alternative investment

funds or UCITs, and there are also no obligations on the unregulated end user or

beneficiary of the financial instruments.

Reporting obligations lie with each counterparty to the trade. Previously, under MiFID,

a firm could rely on a broker to report, however now MiFID II includes transmission of a

trade as a reporting trigger, this is no longer possible.


What?

The scope in terms of the products which need to be reported under MiFIR/MiFID II

covers any security or derivative traded on an EU exchange. MiFID II/MiFIR has

widened this scope to include trades on multilateral trading facilities (MTFs), organised

trading facilities (OTFs) and registered markets (RMs).

It would also now include a reporting obligation on trades based on indices, where the

underlying is traded on an EU exchange, as well as derivatives traded outside of the

EU where the underlying is in the EU.

MiFIR/MiFID II has expanded the original definition of transaction (“an acquisition,

disposal or modification of a reportable financial instrument", Article 3 (2) of RTS32) to

include transmission.

The scope of reportable products has also been expanded to include deposit

receipts, ETFs, structured finance and bonds (note that FX forwards are still not

reportable under MiFID II as they are not listed anywhere).

Data fields that would need to be submitted have been almost trebled. Original MiFID

transaction reports contained 23 data fields, and the new regime will require 81 (only

13 of which will be the same). The extra fields will contain information such as algo IDs,

short sales distinction and trader IDs.


Where?

The scope of MiFID II and MiFIR extends

automatically to EU member states, and also to

branches of EU firms in non EU states.

The reporting of the trades is done through

an approved reporting mechanism (ARM)

such as UnaVista or Bloomberg. However,

trades can also be reported via the MTF

through whose systems the transaction was

completed.


When?

The transaction reporting requirements will go live on 3 January 2017, and

firms are expected to be preparing throughout 2015 and 2016.

As with EMIR and REMIT regulations, the expectation is to have trades

reported on a T+1 basis.


How?

Reports are expected to be submitted after the following triggers:

- modification

- conclusion

- termination

- transmission

Affected firms are expected to gather the relevant data and submit it within one working day.


Why?

MiFID II was designed to enhance integrity in the market, and MiFIR was

designed as a regulation to ensure there are no national differences in

implementation.

The financial crisis of 2008 exposed a number of weaknesses in the

original MiFID regime, with particular gaps exposed in the non-equities

market. Following a number of consulting papers, MiFID II was introduced.


C – EMIR level 2

EMIR Level 2

validation


EMIR - Introduction and update

European Markets Infrastructure Regulation (EMIR) was introduced to regulate

the derivatives trading market. As it is a regulation, it is applicable across all EU

member states.

Its main aims and requirements were as follows:

- to ensure all over the counter (OTC) derivatives are cleared through a central

counterparties (CCP)

- to ensure all derivatives transactions are reported a trade repository

- to ensure risk reduction techniques are applied to non-centrally cleared

derivatives trades


EMIR Level 2 - Introduction

The reporting requirements of EMIR came into effect in February 2014, and the market experienced

difficulties and challenges in providing the correct and accurate levels of data to the regulators.

In August 2014 daily trade collateral and valuation reports against open positions was required.

In order to improve the quality of data further, and therefore improve its level of usability for regulators,

ESMA have introduced updates to its regulation, known as Level 2 validation.


EMIR Level 2 - Context

The updates to the regulation include altered data fields, to ensure reconciliation between the two

counterparties trade reports, as the matching percentages market wide have not been strong (across

approximately 10 billion trades that have gone through since February 2014).

The full updates to the data fields can be found at the end of this presentation, and will be effective and

enforceable from 1st November 2015.

There have been several fines across the market in this area, which is a marker of the struggles the industry

has faced in implementing a solution. Fines include:

- International investment bank fined £5.6m for failing to report properly over a

third of transactions

- Global investment bank fined £2.45m for failures in transaction reporting

- Spread betting firm fined £490,000 for transaction reporting failures

- Global investment bank fined £4.7m for failing to properly report relevant

transactions


Asset Class Coverage 2015

eg wealth managers

eg large corporates

eg financial services


Asset Class Coverage 2017

REMIT does not require double reporting. For example, if an OTC derivative trade

is reportable under EMIR requirements, it does not need to be reported again under

REMIT. The FCA and Ofgem work closely together to ensure that all trades are

captured and reported to necessary authorities.


D - CASS

CASS

Compliance


Context - Lehman Brothers

Protection of client property is brought into focus if a firm becomes insolvent

• Lehman Brothers

When Lehman Brothers collapsed in September 2008, the claims of the clients of its UK investment

bank, Lehman Brothers International (Europe), which alleged that their money should have been held

by the firm as client money (and thus ring-fenced from the claims of the firm’s general creditors),

exceeded by a huge margin the money actually held in the segregated client money accounts.

Those claiming a right to client money fell broadly into three categories:

– Those whose money was held in segregated client accounts (although over US$1 billion of that money

had been deposited with a Lehman affiliate bank in Germany which was itself insolvent).

– Those whose money would have been segregated by the firm but for the fact that at the time that the firm

entered administration the money was temporarily held in its general bank accounts (a situation permitted

under the “alternative approach” provided for in the CASS rules) and frozen thereafter.

– Those (in particular, a number of Lehman affiliates) whose money should have been recognised and

segregated as client money in accordance with the CASS rules, but was never recognised and treated by

the firm as such.


Context – MF Global

• MF Global

In late October 2011, MF Global experienced a spectacular meltdown of its financial condition,

directly caused by improper transfers of over $891 million from customer accounts to a MF broker-

dealer account to cover losses created by trading losses.

On October 31, 2011, MF Global executives admitted that transfer of $700 million from customer

accounts to the broker-dealer and a loan of $175 million in customer funds to MF Global’s UK

subsidiary to cover (or mask) liquidity shortfalls at the company occurred on October 28, 2011. MF

could not repay these monies with its own funds. Improper co-mingling, or mixing, of company and

client funds took place for days before the illicit transfer and loans – and perhaps many other days

earlier in the year. According the New York Times, "MF Global dipped again and again into customer

funds to meet the demands", perhaps beginning as early as August 2011.[4]

MF Global declared bankruptcy on October 31, 2011, and faced liquidation beginning in November

2011.


The purpose of the CASS rules

The purpose of Client Money & Assets Rules (CASS) is to regulate:

The effect of the CASS rules is to create a series of statutory trusts designed to

protect client property via:

• The segregation of Client Money and assets from the firm’s money and

assets

• Proper recordkeeping to ensure that Client Money and Assets remain

separated from the firm’s in case of default by the firm

• The speedy, accurate and complete return of assets in the event of the

firm’s insolvency


Scope Overview

Principle for Business - Principle 10:

“A firm must arrange adequate protection for clients’ assets when it is

responsible for them”

The requirements apply:

• Where the firm receives and holds Client Money in a firm’s Client

account

• Where the firm receives and holds Client Assets in a firm’s Client

nominee

• Where the firm passes Client Money and assets to third parties e.g.

investment trust brokers

• Were the firm is controlling Client Money or assets and/or has a

mandate over the Client’s account


Applicable FCA CASS Rules – The code!

The FCA handbook is divided into individual sourcebooks – the key

CASS ones are:

CASS 3 CASS 1 & 1A CASS 5

CASS HANDBOOK

Application

Classification

Ops Oversight

Collateral

Client Money

Insurance

Mediation Mandates

CASS 8

Information

to Clients Resolution Pack

CASS 9 CASS 10

CUSTODY

ASSETS

CLIENT

MONEY &

Client Money Distribution

CASS 6 CASS 7 & 7A

Debt

Management

Client Money

CASS 11

Commodity

Futures Trading

Commission

Part 30

exemption order

CASS 12


Enforcement

Ba

rcla

ys

6/10 9/11 12/11 9/12 9/13 5/14 4/15

£38m

AA

M Barclays Transact

£7.2m

Bla

ckro

ck

JP

Mo

rga

n

£9.5m

£3.5m

£33m

£1.1m

• BNYM fine in April 2015 was largest CASS fine ever but did not follow the table below based on £1.5 Trillion of

assets in custody

• Barclays fine in May 2014 was first FCA fine for CASS 6 failings – Barclays failed in its duty to safe custody

assets of its affiliates and its affiliates clients' amounting to £16 billion

• FCA Fines Table: Level of

seriousness

% Client

Money

% Safe custody

assets

Level 1 0 0

Level 2 1 0.2

Level 3 2 0.4

Level 4 3 0.6

Level 5 4 0.8

• Lvl 5 : Reckless, misappropriation

• Lvl 4 : Market abuse, TCF,

regulated activities without

permission

• Lvl 3 : Altering reporting data,

record keeping, etc

• Lvl 2 : delays in correcting, record

keeping, etc

BN

YM

£126m


Receiving Client Money – the key requirements

34

Under the NORMAL approach

One client’s money must not be used to pay for another client’s transactions

Client

Money

Account

Banked within 1 business day

Mixed Remittances e.g.

rebates, bank interest Fees and charges, firm portion

of mixed remittance

Except prudent segregation or pre-

funding to protect the Client

Client

FIRM

Client money must be

receipted

directly into client bank a/c


Reconciliations & Calculations - Overview

36

The standard method of internal client money reconciliation:

Client Money Calculation:

The Internal reconciliation

(CASS 7.15.12 R)

Bank Reconciliation:

The External Reconciliation

(CASS 7.15.20 R)


Reconciliations & Calculations - Overview

37

A non-standard method of internal client money reconciliation:

Client Money Calculation:

The Internal reconciliation

Bank Reconciliation:

The External Reconciliation

Some firms do not have a general ledger

Firms using a non standard method must notify the FCA of their intention to use a non

standard method and send a written report to the FCA prepared by an independent auditor on

a reasonable assurance basis


Breach Reporting & Management

38

Immediately reportable breaches:

• Materially inaccurate, or out of date, client records and accounts

• Material failure to perform daily calculation;

• Material failure to fund shortfall or remove an excess; and

• Material failure to identify and resolve a discrepancy

Other breaches:

• Must be reported to FCA if considered material – and are all reported by auditors

at year end

• Consider CASS impacts of other breaches e.g. failed direct debits

• Remember CASS mandate breaches

• Ensure remediation also considers CASS requirements – and if in doubt, provide

funding

• Remember the firm is responsible for its suppliers’ actions


CASS Resolution Pack – The Requirements

39

Purpose: to enable a Insolvency Practitioner to return money &

assets to Clients rapidly

New requirement was effective from 1 October 2012 CASS10

Requirement if either or both of CASS 6 and 7 applies, unless CASS 6 applies only in respect of arranging the safeguarding and

administration of assets

Pack must be continuously maintained – much of the documentation to be updated within 5 business days with any

material changes

Any adviser, IP, receiver or administrator must be provided with the pack in the event of the firm being, or contemplating being,

insolvent

Information covers governance, responsibilities and Client agreement terms as well as the details of the assets themselves


CASS Resolution Pack – CASS 10 Summary

41

The RP should provide a full picture of where assets and cash are held, how to

identify Client entitlements and how to retrieve them, ready for distribution.

WHEN? WHAT? (key examples)

• Must be able to retrieve documents ‘as

soon as practicable’ and to hand over

all required documents within a

maximum of 48 hours

• Some items must be available

immediately

• Annual reporting to the firm’s governing

body and immediate FCA report of non-

compliance is also required

• Institutions which hold (or could hold) Client

Money or assets

• Details of each senior manager, director and

others necessary o the performance of

operational functions imposed by CASS

• Copies of agreements with third parties,

including trust and side letters

• Obligations of companies within group

• If using a third party – document stating how

to access data and transfer Client

Money/assets

• Current data on calculations, reconciliations,

due diligence, client categorisation

• Client agreements, including those covering

the use of Client assets by the firm


Evidence

42

If it isn’t recorded, it didn’t happen!

It covers ……….. everything a firm does e.g.

• Local management

• Approval & notification of non-standard and/or alternative approaches

• Bank accounts’ trust status

• Banks & deposit takers due diligence

• Management Information

• Day to day procedures, documentation, oversight and supervisory sign-off

• Periodic senior management and governance oversight

• Integration with governance structures

• CF10a oversight and approvals

• Breach reporting

• Audit

…. And the management of changes


Change Management

43

FSA Client Money Review Report 2010:

“Operational and systems changes during transitional periods posed a high risk of

segregation errors”

Change management processes & reporting to:

• Identify any expected impacts of change on Client assets

• Ensure that safeguards and controls are included in plans

• Manage and monitor these processes

• Provide senior management with appropriate MI

• Senior management ultimately responsible (issues to be reported to the CF10a)


Significant Influence Function

44

The CF10a:

• Individual with responsibility for CASS operational oversight

• A required and significant influence function – separate from other

functions in medium and large firms

• Responsibilities

• Oversight of the operational effectiveness of that firm’s systems and controls

that are designed to achieve compliance with CASS;

• Reporting to the firm’s governing body in respect of that oversight;

• Completing and submitting a CMAR to the FCA


Preparing for an FCA visit

• Mapping of the CASS rules to the firms cash and asset arrangements?

• Complete understanding of the firms third parties processes and flows?

• Custody arrangements are sufficient to protect client assets e.g. registration,

liens, client money arising etc?

• Do you need to construct an Internal System Evaluation method?

• Have you documented all your CASS policies and had sign off from your

Governance Committee?

• Do you follow a non-standard internal client money reconciliation or an

alternative approach and if so have you planned for your auditor to review this?


PS14/09

The Objective

The main goal of the CASS regime:

Maximise the amount and speed of return of client

assets in a firm insolvency

Common failings:

• failing to recognise client money or custody

assets

• operational errors

• unresolved differences

• intra day exposure

• uncertainty over records

• incorrect use of exemptions

PS14/09 is the FCA’s response to these failings

The Scope

PS14/09 is a rewrite with complex changes

to:

• CASS 6 (custody assets)

• CASS 7 (client money)

• CASS 7A (client money distribution)

• CASS 8 (mandates)

• CASS 9 (reporting to clients)


Questions

cass and tr - ed newman (sept 2015)

Documents