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 3CASS 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
Barclays
6/10 9/11 12/11 9/12 9/13 5/14 4/15
£38m
AAM
Barclays Transact
£7.2m
Blackrock
JPMorgan
£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
BNYM
£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)

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