CASS 15.4 Segregation: secure, liquid assets

1. (1) Regulation 21(2)(b) of the Electronic Money Regulations provides that safeguarding institutions may invest relevant funds received in exchange for electronic money in secure, liquid, low-risk assets. Assets are liquid if approved as such by the FCA.

2. (2) Regulation 23(6)(b) of the Payment Services Regulations provides that safeguarding institutions may invest relevant funds received for the execution of payment transactions unrelated to the issuance of electronic money in such secure, liquid assets as the FCA may approve.

1. Subject to CASS 15.4.3G, the FCA has approved the following assets for the purposes of regulation 21(2)(b) of the Electronic Money Regulations and regulation 23(6)(b) of the Payment Services Regulations:

2. (1) items that fall into one of the categories set out in Article 114 of the UK CRR for which the specific risk capital charge is no higher than 0%; or

3. (2) units in a UCITS which invests solely in the assets in (1).

The FCA may, in exceptional circumstances, determine that an asset falling within CASS 15.4.2G is not secure and liquid.

1. Where a safeguarding institution wishes to seek approval of assets that do not fall within CASS 15.4.2G, it must submit an application in writing to the FCA that demonstrates:

2. (1) how the consumer protection objective of safeguarding will be met by investing in the assets in question; and

3. (2) how liquidity risks will be managed.

A safeguarding institution must take reasonable steps to ensure that investment in relevant assets conforms with the general principles and conditions in CASS 15.4.6R and CASS 15.4.7R.

1. The general principles which must be followed are:

2. (1) there must be a suitable spread of investments;

3. (2) investments must be made in accordance with an appropriate liquidity strategy; 

4. (3) the investments must be in accordance with an appropriate credit risk policy;

5. (4) any foreign exchange risks must be prudently managed; and

6. (5) the policies and procedures for complying with the general principles in (1) to (4) must be reviewed at least annually.

1. The general conditions which must be satisfied in the segregation of relevant assets are: 

2. (1) subject to (2), any redemption of an investment must be by payment into a relevant funds bank account of the safeguarding institution; and

3. (2) where a safeguarding institution appoints a third party to manage the relevant assets, the mandate should provide for the proceeds from the sale of any relevant assets to be promptly reinvested in other relevant assets or paid into the safeguarding institution'srelevant funds bank account.

A safeguarding institution may only appoint a third party to manage relevant assets if the third party is a firm with permission to carry out the regulated activity of managing investments.

1. A safeguarding institution that appoints a third party to manage relevant assets must:

2. (1) exercise all due skill, care and diligence in the selection, appointment, and periodic review of the third party and the arrangements for managing the relevant assets; 

3. (2) ensure that the mandate given to the third party prevents the third party from making investment decisions that are inconsistent with the Electronic Money Regulations, the Payment Services Regulations or the requirements in this chapter; and

4. (3) ensure that the arrangements with the third party require the third party to provide the safeguarding institution with information on the number of relevant assets held. Such information should be provided or made available at least every business day and relate to the close of business on the previous business day.

When a safeguarding institution makes the selection, the appointment and conducts the periodic review of the third party it must take into account the expertise and market reputation of the third party with a view to ensuring the protection of clients' rights.

1. (1) A safeguarding institution must make a record of:

   1. (a) the grounds upon which it satisfies itself as to the appropriateness of its selection and appointment of a third party under CASS 15.4.8R and CASS 15.4.9R; and

   2. (b) each periodic review of its selection and appointment of a third party under CASS 15.4.8R, its considerations and conclusions.

2. (2) A record under (1) must be made on the date the selection is made or the review completed (as the case may be).

A safeguarding institution that appoints a third party pursuant to CASS 15.4.8R remains responsible for ensuring that the relevant funds are only invested in accordance with the relevant funds regime.

A safeguarding institution is not required to appoint a third party to manage relevant assets but, if it does, it must comply with CASS 15.4.8R.