On 24 July 2020, the FCA published a Dear CEO letter to authorised firms acting as brokers in wholesale financial markets, who currently, or may in the future, offer services (including clearing broker and prime broker services) that involve holding clients’ cash or securities as collateral. The Dear CEO letter concerns the inappropriate use of title transfer collateral arrangements (TTCAs) and regulatory permissions for financing transactions.
The reason for the Dear CEO letter is that the FCA recently identified examples of inappropriate use of TTCAs by firms that amounted to failures of CASS compliance. The Dear CEO letter asks CEOs to review the use of TTCAs in their business and appends details of what the FCA deems to be inappropriate use of TTCAs for the attention of the senior manager within the firm who has responsibility for client assets or alternatively (for firms without CASS permissions), the senior manager responsible for compliance.
Firms are also reminded that under SUP 15.3.11R(1)(A) it is mandatory to disclose any significant breach of a rule and therefore firms should notify the FCA of any rule breaches that are identified in their approach to CASS compliance regarding TTCAs.
The FCA also reports that it has seen examples of firms incorrectly classifying financial transactions as falling within the prudential matched principal exemption, and therefore holding lower financial resources than may be required and also acting outside their regulatory permissions.
CEOs are asked to reply to the Dear CEO letter by 14 August 2020, confirming that the senior manager with responsibility for client assets, or alternatively the senior manager responsible for compliance, has considered the issues in the appendix and will bring any issues to the attention of the firm’s board. Where rule breaches are identified in relation to using TTCAs or regulatory permissions, the firm should take immediate steps to rectify them and notify the FCA.