Navigating the “Trade vs Settlement” debate

The question of “Trade vs Settlement” accounting for client custody assets has caused a wide range of debate across the industry.  Should a firm record and monitor the assets actually held for clients at a point in time (the settled basis) or additionally reflect the economic impact of any in-flight trades: e.g.: excluding assets which the client has contracted to sell; and including assets which have been purchased but not yet paid for (the trade basis)?

In reality it’s not one or the other. On a day to day basis, both firms and clients need to understand the committed or traded position in order to properly evaluate their economic positions, and to mitigate the risk of over-trading (selling or lending client assets which are already committed under a sale contract). Equally, client cash which is committed under a purchase contract is no longer available to be used in other trades or returned to the client. However, a firm still needs to monitor whether trades are actually settling as expected, and resolve any failures identified. Additionally, we know from experience that in the event of an insolvency, in-flight trades will often not settle.

The custody rules in CASS 6 apply to a firm when it holds financial instruments belonging to a client. The record keeping and reconciliation rules in CASS 6.6 apply to the assets ‘held’ by the firm. The Financial Conduct Authority (‘FCA’) has reiterated that a regulated firm needs to maintain its records and perform those reconciliations based on the assets actually held at a point in time. The expectation of the FCA is clear, with firms being required to perform custody reconciliations and maintain their books and records on an actual or “settled” basis.

The complexity and range of transactions that exist in industry means that identifying when a particular trade has settled can be difficult – however, a good benchmark to use is that an asset can be considered as held for a client or settled, if the corresponding cash payment to the counterparty has settled. PwC has published a paper outlining our interpretation of when an asset is “held” across a number of different scenarios. This is attached at the bottom of the page.

What should firms consider?

Our paper follows a number of key principles, which can be equally applied to alternative scenarios by firm when applying to their business. These are:

  • Are the client’s rights reflecting in the event of insolvency? Is the client protected from any loss?
  • Does the client record show either an asset or client money? It is expected that a client should at all times have one or the other – but not both.
  • Do the books and records accurately reflect actual movements of assets and money: i.e. is the asset “held” in reality?
  • Does the client consider the trade to be settled and consequentially the firm’s obligation fulfilled?

Firm’s should also follow the principle of “best expectations” – that is a firm should maintain their books and records to the best of their knowledge, based on the information available. Following these principles will allow a firm to ensure client’s rights continue to be protected, and books and records are as accurate as possible at all times.

Download Navigating the “Trade vs Settlement” debate

Chris  Sermon

Chris Sermon | Senior Manager
Profile | Email | +44 (0)7834 254567

Ehmer Aziz

Ehmer Aziz | Manager
Profile | Email | +44 (0)7701 296078

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