On 24 July 2020, the FCA published a Dear CEO Letter reminding firms acting as brokers in wholesale financial markets (including clearing brokers and prime brokers) of their duties with regard to title transfer collateral arrangements (TTCA). 

Whilst the FCA acknowledged that firms enter into TTCAs with clients to allow them to use the relevant cash or securities to secure that client's obligations, it reiterated the importance of firms complying with the applicable CASS rules, including the obligations relating to the use of TTCAs. In this regard, the FCA noted that it has recently identified examples of the inappropriate use of TTCAs, including: 

• holding money or assets under a TTCA without meeting the requirement to consider client obligations;
• holding all of a client's money or assets under a TTCA in the absence of present, future, actual, contingent or prospective obligations to the firm; 
• holding an inappropriate amount of money or assets under a TTCA compared to that client's present, future, actual, contingent or prospective obligations; and
• moving an increased amount of collateral from a segregated (CASS) to a TTCA (non-CASS) environment without a corresponding documented consideration demonstrating a connection between the collateral taken and the relevant client obligation. 

In addition, the FCA flagged concerns around firms lacking arrangements to promptly return collateral to clients or segregate it as required by CASS. 

The protection of client money and custody assets has been an ongoing focus for the FCA and, in light of the current COVID-19 pandemic and the increased risk of firm failures or client defaults, this is a timely reminder to ensure that documentation and collateral processes are up to date and subject to regular review.

What you should do next

In view of the FCA letter, we would highlight the following key areas that firms may wish to consider:

• firms should ensure that their TTCA appropriateness policies are reflective of the methods and rationale under which they are undertaking TTCAs with their clients and that such policies are reviewed on a regular basis;
• client obligations should be monitored regularly with the corresponding changes being made to the location and method of holding the client's collateral;
• where there is a material change in either:

(i) the amounts of collateral to be held against client obligations; or

(ii) haircuts applied to collateral,

firms should ensure that such changes comply with their TTCA appropriateness policy;

• agreements documenting TTCA should be reviewed to ensure they align with the firms' appropriateness policy and that collateral movements, and the methods of holding collateral as agreed with the client, are met and properly managed.

The Dear CEO Letter requires firms to confirm to the FCA by 14 August 2020 that the senior manager with responsibility for client assets has considered the issues outlined therein and will bring any issues to the attention of the board.

If you would like to discuss the contents of the Dear CEO Letter or require any assistance in considering your TTCA documentation, operational flows, TTCA appropriateness policies or CASS more generally, please contact Luke Whitmore and Laura Bates.