CL-3.1 CL-3.1 General Requirements
CL-3.1.1
An
investment firm licensee must take care to establish and maintain appropriate systems and controls when it receives or holds assets as collateral in connection with securing aclient obligation to it.CL-3.1.2
The purpose of this section is to ensure that an appropriate level of protection is provided for those
client assets over which aclient gives aninvestment firm licensee the right to use, subject only to an obligation to return equivalent assets to theclient upon satisfaction of theclient's obligation to theinvestment firm licensee .CL-3.1.3
This section does not apply to an
investment firm licensee that has only a bare security interest (without rights to hypothecate) in theclient asset . In such circumstances, theinvestment firm licensee should comply with the custody rules orclient asset protection rules as appropriate.CL-3.1.4
For the purpose of this section only, a bare security interest in the
client's asset gives aninvestment firm licensee the right to realise the assets only on aclient's default and without the right to use those assets other than in default.CL-3.1.5
Differing levels of regulatory protection to the assets form the basis of the two different types of arrangement described in CL-3.1.2 and CL-3.1.3. Under the bare security interest arrangement, the asset continues to belong to the
client until theinvestment firm licensee's right to realise that asset crystallises. But under a "right to use arrangement", the client has transferred to theinvestment firm licensee the legal title and associated rights to the asset, so that when the firm exercises its right to treat the asset as its own, the asset ceases to belong to theclient and in effect becomes theinvestment firm licensee's asset and is no longer in need of the full range ofclient asset protection rules .
