18 October 2016

MiFID II – changes to the client assets and client money rules


The provisions of MiFID II relating to the holding of client assets (including client money) reflect broadly those of MiFID I. Accordingly, the core requirements relating to the holding of client assets (such as segregation, record keeping, and restrictions on the use of client assets) remain the same. However, the outright prohibition on title transfer collateral arrangements (TTCAs) for retail clients and other areas of change have the effect of making the MiFID II regime more stringent than the current MiFID I regime, and bringing it more closely into alignment with the FCA regime under CASS.

Governance arrangements

Under MiFID II firms will be required to appoint a single officer of sufficient skill and authority with specific responsibility for matters relating to the firm’s obligations regarding the safeguarding of client assets. This need not be the individual’s sole role so they could, for example, also carry on the compliance oversight function. An annual audit of the adequacy of client assets arrangements will also be required. This approach reflects that already contained in CASS.


MiFID II prohibits firms from concluding TTCAs with retail clients for the purpose of securing or covering present or future, actual or contingent, or prospective obligations. This approach is already contained in CASS.

Additionally, the relevant Level 2 measures (contained in the Delegated Directive) require firms dealing with non-retail clients to consider properly (and be able to demonstrate that they have done so) the use of TTCAs in the context of the relationship between the client’s obligation to the firm and the client assets subjected to the TTCA by the firm. Firms must also highlight to clients the risks involved and the effect of any TTCAs on the client’s assets.

When considering and documenting the appropriateness of the use of TTCAs with non-retail clients, firms should take into account the following factors:

  • whether there is only a very weak argument for using TTCAs;
  • whether the amount of client funds or financial instruments subject to TTCAs far exceeds the client’s obligation to the firm; and
  • whether all clients’ assets must be subject to TTCAs, without considering what obligation each client has to the firm.
Securities financing transactions 

MiFID II permits firms to enter into securities financing transactions (such as stock lending and repo transactions) in certain circumstances. Typically these transactions involve the firm in question transferring title in the underlying instruments, subject to an obligation to return equivalent instruments back to the client at a specified time in the future. The Delegated Directive makes it clear that such arrangements must not be used to circumvent the prohibition on TTCAs for retail clients. Firms are also required to adopt specific arrangements for both retail and non-retail clients to monitor the ongoing appropriateness of collateral provided where a client's assets have been lent. Also, where a firm enters into securities financing transactions these must be for specified terms and the express prior written consent of the client must be obtained. While similar provisions exist under MiFID I in respect of retail clients, the requirements under MiFID II will apply to professional clients too.

Monitoring use of client assets

More generally, MiFID II also tightens up the obligations on firms to prevent the unauthorised use of client assets for their own or others’ benefit, including requirements for agreements to address in more detail the steps to be taken if there is insufficient on a client's account at the time of settlement, close monitoring of the firm's expected ability to meet delivery obligations and of failed settlements, with remedial action taken promptly. Appropriate collateral must always be taken and subject to ongoing monitoring, where assets are borrowed.

Intra-group deposits of client funds

Reflecting the current requirements of CASS, the Delegated Directive requires that where a firm deposits client money with a third party within its own group then an intra-group deposit limit of 20% of the aggregate client money held by the firm should be applied. This approach is subject to a proportionality requirement where the firm is able to demonstrate that in view of the nature, scale and complexity of its business such an approach is not proportionate, for instance where the firm only holds a relatively small balance of client money.

Inappropriate security interests etc.

Under the Delegated Directive, custody liens, security interests and rights of set-off enabling third parties to recover debts unrelated to the client or the provision of services to the client are only permitted where required by law in a third country jurisdiction. If a firm is required to enter into such arrangements it must disclose this information to clients.

Segregation of client assets in third countries

Under MiFID I firms are required to ensure that financial instruments deposited with a third party are identified separately from any assets held for the firm either by use of a differently titled account or “other equivalent measures to achieve the same level of protection”. The Delegated Directive limits firms to being able to rely on “other equivalent measures” only where they are unable to comply with the segregation requirements in third countries as a result of local law. Where a firm does rely on such other equivalent measures then this must be disclosed to the client.

Making information available to regulators and insolvency practitioners

Firms will be subject to additional record keeping requirements, mainly for the benefit of insolvency practitioners and regulators in the event that the firm becomes insolvent. Record keeping requirements under MiFID II are similar to the FCA requirements for a CASS resolution pack and will cover:

  • client accounts identifying the funds and instruments of each client;
  • accounts in respect of funds and financial instruments held by the firm for clients;
  • details of any third parties carrying on outsourced or delegated functions; and
  • the identity of individuals involved in safeguarding client assets, including those holding the client assets oversight role.
Firms should make information easily available to Member State regulators and insolvency practitioners responsible for the resolution of failed firms. 

Consequences for firms

As previously mentioned, many of the changes contained in MiFID II mean the EU client assets regime will be more closely aligned with the FCA regime under CASS, so the impact on UK firms is likely to be less significant than on firms elsewhere in the EU. Probably of most significance for UK firms is the new provision requiring them to consider the appropriateness of TTCAs for non-retail clients. This will mean firms will have to introduce new processes and documentation to demonstrate that they have satisfied this additional requirement.

Please do get in touch with a member of the Financial Regulation team to discuss how we can assist you with MiFID II implementation.

A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
Share on LinkedIn Share on Facebook Share on Twitter
    You might also be interested in

    It’s official. On 5 March 2021 the UK Financial Conduct Authority (FCA) announced that all LIBOR settings will either cease to be published by any administrator or no longer be representative, with...

    09 March 2021

    We examine changes to the requirements regarding client communications (including marketing) under MiFID II.

    14 December 2016

    The FCA has published a consultation paper containing proposals to enhance the conduct of business rules for firms providing CFDs to retail clients.

    09 December 2016

    The Commission has published a report on EMIR, suggesting ways in which the regime could be made simpler and more proportionate.

    01 December 2016

    Legal services for your business

    This site uses cookies to enhance your experience and to help us improve the site. Please see our Privacy Policy for further information. If you continue without changing your settings, we will assume that you are happy to receive these cookies. You can change your cookie settings at any time.

    For more information on which cookies we use then please refer to our Cookie Policy.