8.2.1. Meaning of "Client Money"

All Money received or held on behalf of a Client in the course of, or in connection with, the carrying on of Investment Business in or from the AIFC is Client Money, except Money which is:

• (a) (where the Authorised Firm is a Bank) held as a deposit by the Authorised Firm;
• (b) due and payable by the Client to the Authorised Firm for the account of the Authorised Firm. Examples of situations where Money is due and payable to an Authorised Firm includes Money which is payable to the Authorised Firm in respect of its charges or a Client purchase or in settlement of a margin payment;
• (c) belongs to another Person within the Authorised Firm’s Group (unless that Person notified the Authorised Firm in writing that the beneficial owner of the Money is a Person who is not part of the Authorised Firm’s Group and has requested that the Client Money Rules should apply to such Money);
• (d) in an account in the Client’s name over which the Authorised Firm has a Mandate or similar authority and which is subject to COB 8.4;
• (e) received in the form of a cheque, or other payable order, made payable to a third party other than a Person or account controlled by the Authorised Firm, provided the cheque or other payable order is intended to be forwarded to the third party within one business day of receipt; or
• (f) Fund Property of a Fund.Where the Authorised Firm is a Bank and holds the Client's Money as a Deposit in accordance with (a) above, it must prior to providing the Investment Business in respect of that Money notify the Client in writing that:
• (a) the Money held by the Authorised Firm is held as a Deposit and will not be subject to the Client Money Rules; and
• (b) in the event that the Authorised Firm fails, the Client Money Distribution Rules will not apply.

8.2.2. Exclusion of the Client Money Rules

Where the Client is a Market Counterparty or a Professional Client, the Authorised Firm and the Client may agree to exclude the application of the Client Money Rules. Any such agreement with the Client must be in writing and must be entered into before the Authorised Firm provides Investment Business in respect of that Money.

Where the Authorised Firm proposes to exclude the application of the Client Money Rules under this COB 8.2.2, it must prior to obtaining the Client's agreement disclose to the Client in writing that the Money held by the Authorised Firm will not be subject to the protections conferred by the Client Money Rules.

8.2.3. General requirements

An Authorised Firm which receives or holds Client Money for a Segregated Client must:

• (a) comply with the Client Money Rules in relation to that Client Money; and
• (b) have systems and controls in place to be able to evidence its compliance with the Client Money Rules.

8.2.4. Client Money Accounts

A Client Money Account in relation to Client Money is an account which:

• (a) is held with a Third Party Account Provider;
• (b) is established for the purpose of holding Client Money;
• (c) is maintained in the name of the Authorised Firm or a Nominee Company controlled by the Authorised Firm; and
• (d) includes the words 'Client Account' in its title.

8.2.5. Requirement to pay Client Money into Client Money Account

Where an Authorised Firm receives or holds Client Money it must ensure (except where otherwise provided in COB 8.2.8) that the Client Money is paid into one or more Client Money Accounts within one day of receipt.

Where an Authorised Firm deposits any Money into a Client Money Account, such Money is Client Money until the Money is withdrawn from the Client Money Account in accordance with the Client Money Rules.

8.2.6. Client Money held for Segregated Clients in a Client Money Account

An Authorised Firm may hold Client Money belonging to a Segregated Client:

• (a) in a Client Money Account solely for that Client; or
• (b) in a Client Money Account containing the pooled Client Money of more than one Segregated Client.

8.2.7. Client Money Account to contain Client Money only

An Authorised Firm must:

• (a) not deposit its own Money into a Client Money Account, other than where:

(i) a minimum sum is required to open the Client Money Account, or to keep it open;

(ii) the Money is received by way of mixed remittance (provided the Authorised Firm transfers out that part of the payment which is not Client Money within one day of the day on which the Authorised Firm would normally expect the remittance to be cleared);

(iii) interest credited to the account exceeds the amount payable to Segregated Clients (provided that the Money is removed within twenty-five days); or

(iv) it is to meet a shortfall in Client Money;

• (b) maintain systems and controls for identifying Money which must not be in a Client Money Account and for transferring it without delay;
• (c) not use Client Money belonging to one Client to satisfy an obligation of another Client; and
• (d) ensure that no off-setting or debit balances occur on Client Money Accounts.

8.2.8. Exceptions to Holding Client Money in Client Money Accounts

The requirement for an Authorised Firm to pay Client Money into a Client Money Account does not apply with respect to Client Money:

• (a) received in the form of cheque, or other payable order, until the Authorised Firm, or a Person or account controlled by the Authorised Firm, is in receipt of the proceeds of that cheque;
• (b) temporarily held by an Authorised Firm before forwarding to a Person nominated by the Client; or
• (c) in connection with a Delivery Versus Payment Transaction where:

(i) in respect of a purchase by the Client, the Client Money will be due to the Authorised Firm within one day following the Authorised Firm's fulfilment of its delivery obligation to the Client; or

(ii) in respect of a sale by the Client, the Client Money will be due to the Client within one day following the Client's fulfilment of its delivery obligation to the Authorised Firm. Where (b) or (c) apply, the Authorised Firm must pay the Client Money into a Client Money

Account where it has not fulfilled its delivery or payment obligation within three days of receipt of the Money or Investments, except where the circumstances in (c)(ii) apply and the Authorised Firm instead safeguards Client Investments of a value at least equal to the value of such Client Money.

An Authorised Firm must maintain adequate records of all cheques and payment orders received in accordance with (a) above including, in respect of each payment, the date of receipt, the name of the Client for whom payment is to be credited and the date on which the cheque or payment order was presented to the Authorised Firm's Third Party Account Provider. The records must be kept for a minimum of six years.

8.2.9. Conditions for use of Third Party Account Providers

Save as provided in this COB 8.2.9, an Authorised Firm may only pass, or permit to be passed, Client Money to a Third Party Account Provider if:

• (a) the Client Money is to be used in respect of a Transaction or series or Transactions for that Client;
• (b) the Client Money is to be used to meet an obligation of that Client;
• (c) the Third Party Account Provider is a Bank or a Regulated Financial Institution which is authorised to accept or take Deposits; or
• (d) the Client Money is put into a Shari'ah product that is offered by a Third Party Account

Provider and that has been approved by the AFSA as being suitable for the holding of Client Money.

In respect of (a) and (b) above, an Authorised Firm must not hold the Client Money with the Third Party Account Provider longer than necessary to effect a Transaction or satisfy the Client's obligation.

8.2.10. Holding Client Money with Third Party Account Providers

An Authorised Firm may only pay, or permit to be paid, Client Money to a Third Party Account Provider pursuant to COB 8.2.9 (c) or (d) above where it has:

• (a) undertaken appropriate due diligence on the Third Party Account Provider and concluded on reasonable grounds that the Third Party Account Provider is suitable to hold that Client Money; and
• (b) confirmed that the laws and regulations of both:

(i) the jurisdiction in which the Client Money will be held; and

(ii) the jurisdiction in which the relevant Bank or Regulated Financial Institution is legally established (if different), recognise that Client Money belongs beneficially to the Client and will not be available to satisfy any debts of the Bank or Regulated Financial Institution.

8.2.11. Due diligence on Third Party Account Providers

When undertaking due diligence on a Third Party Account Provider, an Authorised Firm should have regard to the following:

• (a) the following characteristics of the Third Party Account Provider:

(i) its expertise and market reputation;

(ii) its credit rating;

(iii) its capital and financial resources;

(iv) the amount of Client Money placed, as a proportion of its overall capital and deposits;

(v) the extent to which the Client Money would be protected under a deposit guarantee protection scheme;

(vi) where such information is available, the level of risk in the investment and loan activities undertaken by it or members of its Group;

(vii) its use of agents and service providers; and

(viii) the financial position of its Group; and

• (b) (without prejudice to the obligation under (a) above) any legal requirements or market practices in the jurisdiction in which it is located (including the insolvency regime in that jurisdiction) which may adversely affect the protections available in respect of any Client Money placed with the Third Party Account Provider.

When assessing the suitability of the Third Party Account Provider, the Authorised Firm must ensure that the Third Party Account Provider will provide protections equivalent to the protections conferred by the Client Money Rules.

An Authorised Firm must have systems and controls in place to ensure that the Third Party Account Provider remains suitable to hold Client Money for its Segregated Clients. This includes undertaking appropriate due diligence, in the manner described above, on an ongoing basis.

An Authorised Firm must be able to demonstrate to the AIFC's satisfaction the grounds upon which the Authorised Firm considers the Third Party Account Provider to be suitable to hold that Client Money.

8.2.12. Obtaining written acknowledgments from Third Party Account Providers

When an Authorised Firm opens a Client Money Account with a Third Party Account Provider it must obtain a written acknowledgement from the Third Party Account Provider stating that:

• (a) the Third Party Account Provider is under an obligation to keep its own Money separate from the Money it holds for its Clients;
• (b) all Money standing to the credit of the account is held by the Authorised Firm as agent and that the Third Party Account Provider is not entitled to combine the account with any other account or to exercise any charge, mortgage, lien, right of set-off or counterclaim against Money in that account in respect of any sum owed to it on any other account of the Authorised Firm; and
• (c) the title of the account is, or will be, sufficient to distinguish that account from any account containing Money that belongs to the Authorised Firm. The Authorised Firm must obtain the written acknowledgement referred to above prior to placing any Client Money into an account with the Third Party Account Provider.

8.2.13. Payments of Client Money from Client Money Accounts

Client Money must remain in a Client Money Account until it is:

• (a) due and payable to the Authorised Firm;
• (b) paid to the Client on whose behalf the Client Money is held or to a duly authorised representative of such Client;
• (c) paid in accordance with an instruction from the Client on whose behalf the Client Money is held;
• (d) required to meet the payment obligations of the Client on whose behalf the Client Money is held; or
• (e) paid out in circumstances that are otherwise authorised by the AIFC.

Money paid out by way of cheque or other payable order under this Rule must remain in a Client Money Account until the cheque or payable order is presented to the Client's bank and cleared by the paying agent

8.2.14. Client Money arising from Client Investments

Money arising from, or in connection with, the holding of Client Investments and which is due to a Client must be treated as Client Money in accordance with the Client Money Rules.

8.2.15. Distribution Event

Following a Distribution Event, an Authorised Firm must comply with the Client Money Distribution Rules and all Client Money will be subject to such Rules.

8.2.16. Client Money Distribution Rules (Investment Business)

(1) The requirements in this COB 8.2.16 are the Client Money Distribution Rules (Investment Business) and to the extent that these Rules are inconsistent with the AIFC Insolvency Regulations, these Rules will prevail.

(2) Following a Distribution Event, the Authorised Firm must distribute Money in the following order of priorities:

1. (a) firstly, in relation to Client Money held in a Client Account on behalf of Segregated Clients, claims relating to that Money must be paid to each Segregated Client in full or, where insufficient funds are held in a Client Account, proportionately, in accordance with each Segregated Client’s valid claim over that Money;
2. (b) secondly, where the amount of Client Money in a Client Account is insufficient to satisfy the claims of Segregated Clients in respect of that Money, or not being immediately available to satisfy such claims, all other Money held by the Authorised Firm must be used to satisfy any outstanding amounts remaining payable to Segregated Clients in respect of their Client Assets but not satisfied from the application of (a) above;
3. (c) thirdly, upon resolution of claims in relation to Segregated Clients, any Money remaining with the Authorised Firm must be paid to each Client in full or, where insufficient funds are held by the Authorised Firm, proportionately, in accordance with each Client’s valid claim over that Money; and
4. (d) fourthly, upon satisfaction of all claims in (a), (b) and (c) above, in the event of:
5. (i) the appointment of a liquidator, receiver or administrator, or trustee in bankruptcy over the Authorised Firm or the Nominee Company, payment must be made in accordance with the AIFC Insolvency Regulations; or

(ii) all other Distribution Events, payment must be made in accordance with the direction of the AFSA.

8.2.17. Procedures relating to Client Money Accounts

An Authorised Firm must have procedures for identifying Client Money received by the Authorised Firm (by whatever means they are received) and for promptly recording the receipt of the Money either in the books of account or a register for later posting to the Client cash book and ledger accounts.

An Authorised Firm must have procedures for ensuring all withdrawals from a Client Money Account are authorised and carried out in accordance with this COB 8.2.17.

8.2.18. Client disclosures

An Authorised Firm that holds Client Money belonging to a Client in must in good time before it provides the relevant Investment Business disclose the following information to the Client:

• (a) that the Client is subject to the protection conferred by the Client Money Rules and, as a consequence:

(i) this Money will be held separate from Money belonging to the Authorised Firm; and

(ii) in the event of the Authorised Firm's insolvency, winding up or other Distribution Event stipulated by the AIFC, the Client's Money will be subject to the Client Money Distribution Rules;

• (b) whether the Client Money of that Client may be held by a third party on behalf of the Authorised Firm, and if so, what degree of responsibility the Authorised Firm has for any acts or omissions of the third party; and what the likely consequences are for the Client of the insolvency of the third party;
• (c) whether interest is payable to the Client and, if so, on what terms;
• (d) if applicable, that the Client Money may be held in a jurisdiction outside the AIFC and the market practices, insolvency and legal regime applicable in that jurisdiction may differ from the regime applicable in the AIFC;
• (e) if applicable, details about how any Client Money arising out of Islamic Financial Business are to be held; and
• (f) details of any rights which the Authorised Firm may have to realise Client Money held on behalf of the Client in satisfaction of a default by the Client or otherwise.

8.2.19. Client reporting

In relation to each Client for whom it receives or holds Client Money, an Authorised Firm must provide at least once a year a statement of the Client Money unless such a statement has been provided in a periodic statement in accordance with COB 9.

8.2.20. Record keeping

An Authorised Firm must maintain records which enable it to determine promptly the total amount of Client Money that it holds for each of its Clients.An Authorised Firm must maintain records:

• (a) which enable the Authorised Firm to demonstrate compliance with the Client Money Rules; and
• (b) which enable the Authorised Firm to demonstrate and explain all entries of Money held in accordance with the Client Money Rules. Records must be kept for a minimum of six years.

8.2.21. Reconciliations

An Authorised Firm must maintain a system to ensure that accurate reconciliations of the Client Accounts are carried out at least once in every calendar month.

8.2.22. Nature of reconciliation

The reconciliation must include:

• (a) a full list of individual Segregated Client credit ledger balances, as recorded by the Authorised Firm;
• (b) a full list of individual Segregated Client debit ledger balances, as recorded by the Authorised Firm;
• (c) a full list of unpresented cheques and outstanding lodgements;
• (d) a full list of Client Account cash book balances; and
• (e) formal statements from Third Party Account Providers showing account balances as at the date of reconciliation.

8.2.23. Requirements for reconciliation

An Authorised Firm must:

• (a) reconcile the individual credit ledger balances, Client Account cash book balances, and the Third Party Account Provider Client Account balances;
• (b) check that the balance in the Client Accounts as at the close of business on the previous day was at least equal to the aggregate balance of individual credit ledger balances as at the close of business on the previous day; and
• (c) ensure that all shortfalls, excess balances and unresolved differences, other than differences arising solely as a result of timing differences between the accounting systems of the Third Party Account Provider and the Authorised Firm, are investigated and, where applicable, corrective action taken as soon as possible. An Authorised Firm must perform the reconciliations in the preceding paragraph within 10 days of the date to which the reconciliation relates. An Authorised Firm must ensure that the process of reconciliation does not give rise to a conflict of interest.

8.2.24. Review of reconciliation

When performing reconciliations in accordance with COB 8.2.21, an Authorised Firm should:

1. (a) maintain a clear separation of duties to ensure that an employee with responsibility for operating Client Accounts, or an employee that has the authority to make payments, does not perform the reconciliations; and
2. (b) ensure that the reconciliations are reviewed by a member of the Authorised Firm who has adequate seniority. The member in question must provide a written statement confirming the reconciliation has been undertaken in accordance with the requirements of COB 8.3.21- 8.2.23.

Guidance: Material discrepancies The Authorised Firm should notify the AFSA where there has been a material discrepancy with the reconciliation which has not been rectified. A material discrepancy includes discrepancies which have the cumulative effect of being material, such as longstanding discrepancies.