CBB Volume 4: Contents
CL Client Assets
This Module presents requirements that have to be met by investment firm licenseesG with regards to safeguarding and administrating financial instrumentsG or when they hold or control assets of clientsG for which they are responsible.
The Rules contained in this Module are aimed at ensuring proper protection of client assetsG to minimise the risk of client assetsG being used by investment firm licensees without the client'sG written consent (except to the extent permitted by the Rules) and to restrict the commingling of client assetsG with investment firm licenseeG assets. This Module builds upon Principle 6 — Customer Assets (see Module PB (Principles of Business)). Principle 6 requires investment firm licenseesG to take reasonable care to safeguard the assets of customers for which they are responsible.Amended: January 2007
The Rules contained in this Module are largely principles-based and focus on desired outputs rather than on prescribing detailed processes. This gives investment firm licenseesG flexibility in how to implement the basic standards prescribed in this Module.Amended: January 2007
This Module contains the Central Bank of Bahrain's ('CBB') Directive (as amended from time to time) on client assetsG , with respect to investment firm licenseesG , and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to Category 1 investment firmsG and Category 2 investment firmsG .Amended: January 2011
Adopted: January 2007
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.Adopted: January 2007
CL-A.2 Module History
Evolution of Module
This Module was first issued in April 2006 by the BMA, as part of the first phase of Volume 4 (Investment Business) to be released. It is dated April 2006. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.Amended: January 2007
When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 4 was updated in July 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.Adopted: January 2007
A list of recent changes made to this Module is provided below:
Module Ref. Change Date Description of Changes CL-A.1 07/2007 New Rule CL-A.1.4 introduced, categorising this Module as a Directive. CL-A.1.4 04/2008 Clarified that this Directive only applies to Category 1 investment firmsG and Category 2 investment firmsG . CL-1.1.8 04/2008 Clarified that client bank accounts may only be opened with banks licensed to do business in Bahrain. CL-1.4.1 and 2.6.1 04/2008 Clarified the record retention period to be in line with Article 60 of the CBB Law. Table of Contents and CL-1.5.3 07/2008 Added reference to agreed upon procedures included in Part B of Volume 4 (Investment Business) CL-1.1.1 07/2008 Corrected reference. CL-1.1.20 07/2008 Clarified nature of reconciliation required. CL-1.5.4 07/2008 Reference made to effective date when first auditor report is required. CL-2.3.1 07/2008 Dematerialised safe custody financial instruments now included as a defined term in the Glossary under Part B. CL-A.1.4 01/2011 Clarified legal basis. CL-1.1.4(a) 01/2012 Amended as client asset protection rules not included in Glossary. CL-1.1.2 04/2013 Amended introductory Paragraph of Rule. CL-1.1.4 and CL-1.1.5 04/2013 Rule and Guidance deleted as all assets are subject to client asset protection Rules. CL-1.1.10 01/2016 Clarified Rule. CL-1.5.1 10/2017 Amended Paragraph to clarify that licensees are to formally declare in writing that they do not possess any Client assets. CL-1.5.2 01/2018 Amended paragraph.
This Module does not replace any regulations or circulars in force prior to April 2006.Amended: January 2007
Further guidance on the implementation and transition to Volume 4 (Investment Business) is given in Module ES (Executive Summary).Amended: January 2007
CL-B Scope of Application
CL-B.1 License Categories
Since Category 1 and Category 2 investment firmsG only are permitted to undertake the activity specified in Rule CL-B.1.1, the requirements contained in this Module do not apply to Category 3 investment firm licenseesG .
Client assetsG comprise moneyG or financial instrumentsG belonging to clientsG of an investment firm licenseeG , which are held or controlled by the investment firm licenseeG in connection with the conduct of regulated investment servicesG .
CL-B.1.4(a) Directly held by the investment firm licenseeG ;(b) Held in an account in the name of the investment firm licenseeG ;(c) Held by a person, or in an account in the name of a person, controlled by the investment firm licenseeG ; or(d) Held in an account with another person, controlled by the investment firm licenseeG .Amended: January 2007
CL-B.1.5Amended: January 2007
CL-B.1.6Amended: January 2007
CL-B.2 Overseas Subsidiaries and Branches
Investment firm licenseesG must ensure that their branches and subsidiaries operating in foreign jurisdictions comply, at a minimum, with local client asset rules (where applicable).
Where client asset rules applied by overseas branches and subsidiaries of an investment firm licenseeG fall below the standards set out in this Module, the investment firm licensee must notify the CBB of the fact.Amended: January 2007
The CBB encourages its investment firm licenseesG to apply — with respect to its overseas branches and subsidiaries — client asset rules at least equivalent to those set out in this Module. Where this is not the case, then the CBB will consider any potential risk to the investment firm licenseeG that may arise through adverse reputational or other consequences.Amended: January 2007
CL-1 Client Asset Protection
CL-1.1 Client Asset Protection Rules
Segregation of Client Assets
CL-1.1.1Amended: July 2008
CL-1.1.2(a) That clientG has given his express consent in writing;(b) The use of the client assetsG is restricted to the terms agreed by him; and(c) The document in which that client'sG consent is requested by the investment firm licenseeG gives clear information to him on:(i) The obligations and responsibilities of the investment firm licenseeG and/or of the clientsG for whose account the investment firm licenseeG has been allowed to use the client'sG financial instrumentsG , with respect to the use of the financial instrumentsG (including the terms for the restitution of the financial instrumentsG ); and(ii) The risks involved.Amended: April 2013
Amended: January 2007
An investment firm licenseeG should communicate to its clientsG in writing, at a minimum, the information specified in Guidance Paragraph CL-6.1.2, regarding client assetsG held. This information must be reported as soon as practicable, but no later than 10 business days from the initial transaction date. Subsequent statements must be provided in accordance with client reporting requirements under Section CL-1.3.
[This Paragraph was deleted in April 2013.]Deleted: April 2013
[This Paragraph was deleted in April 2013.]Deleted: April 2013
For the purposes of CL-1.1.5, a client bank accountG is an account holding client moneyG of one or more clientsG in a bank account designated as such in accordance with the terms of agreement with the clientG /clientsG .
Client bank accountsG may only be opened with banks licensed to do business in the Kingdom of Bahrain, after being subject to due diligence by the investment firm licenseeG . Islamic investment firmsG may only hold client bank accounts with Islamic banks licensed to do business in the Kingdom of Bahrain.Amended: April 2008
For the purposes of CL-1.1.8, when undertaking due diligence, the investment firm licenseeG should take reasonable steps to establish that the bank is appropriate considering, among other factors, the following:(a) Whether it is a duly licensed bank in good regulatory standing;(b) The capital adequacy of the bank;(c) The amount of client moneyG to be placed, as a proportion of the bank's capital and deposits; and(d) The credit rating of the bank, if available.Amended: January 2007
Transfer of Money to Eligible Third Parties
CL-1.1.10Amended: January 2016
Eligible third parties are recognised exchanges, clearing houses and third party intermediaries (such as brokers), that are duly authorised or licensed by the appropriate regulatory oversight body to conduct investment activities.
CL-1.1.12(a) The investment firm licenseeG transfers the client moneyG(ii) To meet a client'sG obligations to provide collateral for a transaction;(b) In the case of a retail clientG , that clientG has been notified in writing that the client moneyG may be transferred to the other person.Amended: January 2007
For the purposes of CL-1.1.10, an investment firm licenseeG must assess the suitability of an eligible third partyG before allowing it to hold or control client moneyG . This assessment must include, at a minimum, the information included in Paragraph CL-6.1.1.
CL-1.1.14(a) A minimum sum required to open the account or to keep it open;(b) Money temporarily held in the account in accordance with the mixed remittance rule stated in CL-1.1.16; or(c) Interest credited to the account which exceeds the amount due to clientsG as interest and which has not yet been withdrawn by the investment firm licenseeG .Amended: January 2007
If it is prudent to do so to ensure that client moneyG is protected, an investment firm licenseeG may pay into a client bank accountG money of its own, and that money will then become client moneyG for the purposes of the client asset protection rulesG until the licensee retrieves it.
CL-1.1.16(a) Pay the full sum into a client bank accountG ; and(b) Pay the money that is not client moneyG out of the client bank accountG within one business day.Amended: January 2007
An investment firm licenseeG should not hold excess client moneyG in its clientG transaction accounts with intermediate brokers, settlement agencies and over the counter (OTC) counterparties; it should be held in a client bank accountG .
An investment firm licenseeG must ensure that a system is implemented to perform reconciliations of both client bank accountsG and eligible third partyG accounts in which client moneyG is held. These reconciliations must be carried out on a regular basis, sufficient to ensure the accuracy of its records (but at a minimum, on a monthly basis as at the last business day of each calendar month).
CL-1.1.19Amended: January 2007
CL-1.1.20Amended: July 2008
In respect of reconciliation, the investment firm licenseeG must ensure that unresolved differences, shortfalls and excess balances are investigated and, where applicable, corrective action is taken as soon as is practicable.
CL-1.2 Stock Lending Rules
An investment firm licenseeG must not undertake or otherwise engage in stock lending activity with or for a clientG unless the investment firm licenseeG has obtained the consent of the CBB and the clientG .Amended: January 2007
CL-1.2.2(a) Relevant collateral is provided by the borrower in favour of the clientG ;(b) The current realisable value of the safe custody financial instrumentG and of the relevant collateral is monitored daily; and(c) The investment firm licenseeG provides relevant collateral to make up the difference where the current realisable value of the collateral falls below that of the safe custody financial instrumentG , unless otherwise agreed in writing by the clientG .Amended: January 2007
CL-1.2.3(a) All of those clientsG have consented to their safe custody financial instrumentG being used for that activity; or(b) The investment firm licenseeG has adequate systems and procedures in place to ensure that only safe custody financial instrumentsG belonging to clientsG who have given their consent are used for stock lending activity.Amended: January 2007
CL-1.3 Client Reporting
An investment firm licenseeG that holds client assetsG for a clientG must send a statement of all client assetsG held by the investment firm licenseeG to its clientG at least once a year or as often as agreed with that clientG .
CL-1.3.2(a) Identify any clients' assetsG which have been provided as collateral;(b) Identify any client assetsG which have been lent; and(c) Show any movement of client assetsG based on either trade date or settlement date clearly and consistently.Amended: January 2007
An investment firm may include the information required in CL-1.3.1 in any periodic statement provided by the investment firm licenseeG to the clientG , or by other separate documents, as long as all sets of information:(a) Are prepared in relation to the same date and period; and(b) Are delivered to the clientG within a reasonable period of one another.Amended: January 2007
Investment firm licenseesG must ensure that proper records, sufficient to show and explain the investment firm licensee'sG transactions and commitments in respect of its client assetsG , are made and which demonstrate compliance with the provisions of this Module. These records must be retained for a period of a minimum of ten years after they were made, unless otherwise required by law.Amended: April 2008
CL-1.4.2(a) Check its record-keeping and clientG asset procedures regularly; and(b) Subject its record-keeping and clientG asset procedures to an appropriate independent review.Amended: January 2007
CL-1.5 Auditor Reports
Investment firm licenseesG that hold or control client assetsG (including where it pools financial instruments held for more than one clientG ) must arrange for their external auditor to report on the licensees' compliance with the requirements contained in this Module. Investment firm licenseesG Category 1 and Investment firm licenseesG Category 2 which do not hold or control Client Assets are obligated to confirm the same annually.Amended: October 2017
Amended: July 2008
The report must be in the form agreed by the CBB, and must be submitted to the CBB within three months of the licensee's financial year end.Amended: January 2018
Amended: January 2007
The format of the Auditor's Report is included in Part B of the Rulebook, as part of the Supplementary Information.Amended: July 2008
Amended: January 2007
CL-1.5.4Added: July 2008
CL-2 Custody Services
CL-2.1 General Requirements
CL-2.1.2(a) Ensure the proper safeguarding of such safe custody financial instrumentsG ;(b) Ensure that such safe custody financial instrumentsG are identifiable and secure at all times;(c) Be able to evidence compliance with the requirements in Section CL-2 to its external auditors and the CBB.Amended: January 2007
As part of these protections, the custody rules require an investment firm licenseeG to take appropriate steps to protect safe custody financial instrumentsG for which it is responsible. These rules are designed primarily to restrict the commingling of clientG and investment firm licenseeG assets and minimise the risk of the client'sG safe custody financial instrumentsG being used by the firm without the client'sG agreement or contrary to the client'sG wishes, or being treated as the investment firm licensee'sG assets in the event of insolvency.
An investment firm licenseeG must, as often as is necessary, but at a minimum on a monthly basis, perform a reconciliation of its record of safe custody financial instrumentsG for which it is accountable but which it does not physically hold, with statements obtained from custodians. In the case of dematerialised safe custody financial instrumentsG not held through a custodian, this reconciliation must be performed with statements obtained from the person who maintains the record of legal entitlement.Amended: July 2008
An investment firm licenseeG must, as often as is necessary, but no less than every six months (or twice in a period of twelve months but at least five months apart), carry out:(a) A count of all safe custody financial instrumentsG it physically holds on behalf of clientsG and reconcile the result of that count with its record of safe custody financial instrumentsG that it physically holds on behalf of its clientsG ; and(b) A reconciliation between the investment firm licensee'sG record of clientG holdings, and the firm's record of the location of safe custody financial instrumentsG .Amended: January 2007
Wherever possible, an investment firm licenseeG should ensure that the reconciliations are carried out by a person (for example an employee of the investment firm licenseeG ) who is independent of the production or maintenance of the records to be reconciled.
CL-2.4 Client Statements
Before investment firm licenseesG provide safe custody services to a clientG , they must notify the clientG as to the appropriate terms and conditions which apply to this service. These must cover, at a minimum, the following matters, wherever applicable:(a) The registration of the safe custody financial instrumentsG , if these are not registered in the investment firm licenseeG clients'G name;(b) The extent of the investment firm licensees'G liability in the event of default by a custodian, except that the investment firm licenseeG must accept the same level of responsibility to its clientG for any nominee company controlled by the investment firm licenseeG or its affiliated company as for itself and may not disclaim responsibility for losses arising from the fraud, wilful default or negligence of the firm;(c) The circumstances in which the investment firm licenseeG may realise a safe custody financial instrumentG held as collateral to meet the client'sG liabilities;(d) The claiming and receiving of dividends, interest payments and other entitlements accruing to the clientG ;(e) Dealing with takeovers, other offers or capital reorganisations and exercising voting, conversion and subscription rights;(f) Arrangements for the distribution of entitlements to shares and any other benefits arising from corporate events, where clientG balances have been pooled;(g) Arrangements for the provision of information to the clientG relating to the safe custody financial instrumentsG which the investment firm licenseeG , or its nominee company, holds on behalf of the clientG ;(h) How often a statement of custody assets will be sent to the clientG and the basis on which the assets shown on the statement are valued;(i) Fees and costs for safe custody services to the extent that they are not notified to the clientG elsewhere; and(j) If the firm intends to pool a safe custody financial instrumentG with that of one or more other clientsG , notification of its intention and, if the clientG is a retail clientG , an explanation of the effects of pooling to that retail clientG .Amended: January 2007
CL-2.4.2(a) Identify any safe custody financial instrumentsG registered in the client'sG own name separately from those registered in any other name;(b) Identify any safe custody assets which are being used as collateral or have been pledged to third parties, separately from any custody assets;(c) Show the market value of any collateral held, as at the date of the statement;(d) For a retail clientG , base the statement on either trade date or settlement date information for cash balances and safe custody investment and notify the basis to the retail client; and(e) Details of movements of each client assetG .Amended: January 2007
CL-2.5 Third Party Custodians
An investment firm licenseeG must require that if a safe custody financial instrumentG is recorded in an account with a custodian, the custodian makes it clear in the title of the account that the safe custody financial instrumentG belongs to one or more clientsG of the investment firm licenseeG .
An investment firm licenseeG that holds safe custody financial instrumentsG with a custodian or recommends custodians to retail clientsG , is expected to establish and maintain a system for assessing the appropriateness of its selection of the custodian and to assess the continued appointment of that custodian periodically as often as is reasonable in the relevant market. The investment firm licenseeG is also expected to make and retain a record of the grounds on which it satisfies itself as to the appropriateness of its selection or, following a periodic assessment, continued appropriateness of the custodian.
CL-2.5.4(a) The expertise and market reputation of the custodian, and once a safe custody financial instrumentG has been lodged by the firm with the custodian, the custodian's performance of its services to the investment firm licenseeG ;(b) The arrangements for holding and safeguarding financial instrumentsG ;(c) An appropriate legal opinion as to the protection of custody assets in the event of insolvency of the custodian;(d) Current industry standard reports;(e) Whether the custodian is regulated and by whom;(f) The capital or financial resources of the custodian;(g) The credit rating of the custodian; and(h) Any other activities undertaken by the custodian and, if relevant, any affiliated company.Amended: January 2007
An investment firm licenseeG must ensure that proper records of the custody assets which it holds or receives, or arranges for another to hold or receive, on behalf of the clientG , are made and retained for a period of ten years after the account is closed.Amended: April 2008
CL-2.6.2(a) The name of the account;(b) The account number;(c) Type of account;(d) Type of asset;(e) The location of the account;(f) Whether the account is currently open or closed;(g) Details of assets held and movements in each account; and(h) The date of opening and where applicable, closure.Amended: January 2007
CL-3.1 General Requirements
An investment firm licenseeG must take care to establish and maintain appropriate systems and controls when it receives or holds assets as collateral in connection with securing a clientG obligation to it.
The purpose of this section is to ensure that an appropriate level of protection is provided for those client assetsG over which a clientG gives an investment firm licenseeG the right to use, subject only to an obligation to return equivalent assets to the clientG upon satisfaction of the client'sG obligation to the investment firm licenseeG .
This section does not apply to an investment firm licenseeG that has only a bare security interest (without rights to hypothecate) in the client assetG . In such circumstances, the investment firm licenseeG should comply with the custody rules or client assetG protection rules as appropriate.
For the purpose of this section only, a bare security interest in the client's assetG gives an investment firm licenseeG the right to realise the assets only on a client'sG default and without the right to use those assets other than in default.
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 clientG until the investment firm licensee'sG right to realise that asset crystallises. But under a "right to use arrangement", the client has transferred to the investment firm licenseeG 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 the clientG and in effect becomes the investment firm licensee'sG asset and is no longer in need of the full range of client asset protection rulesG .
CL-3.2 Third Parties
CL-3.2.1(a) It has reasonable grounds to believe that the third party is suitable to hold that collateral; and(b) The investment firm licensee is able to demonstrate to the CBB's satisfaction the grounds upon which it considers the third party to be suitable to hold clients'G collateral.Amended: January 2007
CL-3.2.2(a) The collateral does not belong to the investment firm licenseeG ; and(b) The third party is not entitled to claim any lien or right of retention or sale over the collateral except to cover the obligations of the clientG which gave rise to that deposit, pledge, charge or security arrangement or any charges relating to the administration or safekeeping of the collateral.Amended: January 2007
An investment firm licenseeG that receives or holds client assetsG under an arrangement in this Section and which exercises its right to treat the assets as its own must ensure that it maintains adequate records to enable it to meet any future obligations including the return of equivalent assets to the clientG .
An investment firm licenseeG which holds assets under an arrangement described in this section must (at least every six months or at other intervals as agreed in writing with the clientG ) send to the clientG a statement listing those assets and their market value as at the date of reporting.
This section applies to an investment firm licenseeG in respect of any written mandateG from a clientG under which the investment firm licenseeG may control a client'sG assets or liabilities in the course of, or in connection with, the investment firm licensee'sG regulated investment services.
Systems and Controls
An investment firm licenseeG that holds mandatesG of the sort described in CL-4.1.1 must establish and maintain adequate records and internal controls in respect of its use of the mandatesG , which should include:(a) An up-to-date list of the mandatesG and any conditions placed by the clientG or the investment firm licensee'sG management on their use;(b) A record of all transactions entered into using the mandatesG , and internal controls to ensure that they are within the scope of authority of the person and the investment firm licenseeG entering into the transaction;(c) The details of the procedures for the giving and receiving of instructions under the authority; and(d) Where the investment firm licenseeG holds a passbook or similar documents belonging to the clientG , internal controls, for the safeguarding (including against loss, unauthorized destruction, theft, fraud or misuse) of any passbook or similar document belonging to the clientG held by the investment firm licenseeG .Amended: January 2007
CL-5 Third Party Related Distribution
CL-5.1 General Requirements
The third party related distribution rulesG in this Module are subject to any applicable rules of law to the contrary.
CL-5.2 Third Party Related Distribution
Upon the insolvency of a third party to which client moneyG has been transferred or is held, the investment firm licenseeG continues to be accountable to the clientG in a fiduciary capacity. However, consistent with a fiduciary's responsibility (whether as an agent or trustee) for third parties under law, an investment firm licenseeG will not be held responsible for a shortfall in client moneyG unless the general laws in the Kingdom of Bahrain or in the relevant jurisdiction requires otherwise, for instance, due to non-compliance with the terms of business in any respect.
To comply with its duties, the investment firm licenseeG must show proper care:(a) In the selection of a third party;(b) When monitoring the performance of the third party; and(c) When notifying clients in its terms of businessG the distribution rules applicable in the event of a third party distribution event.Amended: January 2007
CL-5.2.3(a) The investment firm licenseeG must, as soon as is practicable, make and retain a record of each such client'sG share of the shortfall and must promptly notify the amount of the shortfall to the affected clientsG (except where the investment firm licenseeG chooses to make good the shortfall);(b) Unless the investment firm licenseeG chooses to make good any shortfalls in the client moneyG balances held (or which should have been held) in the client bank accountsG , or third party accounts held by an investment firm licenseeG with the relevant designated bank or eligible third party, such shortfalls shall be borne by clientsG , in proportion to the respective value of their client moneyG balances; and(c) Client moneyG received after the third party-related distribution event:(i) Must not be transferred to the designated bank or eligible third party which has suffered the third party-related distribution event unless this is on the specific instructions of the clientG (given after the occurrence of the third party-related distribution event) in order to settle an obligation of that clientG to that designated bank or eligible third party; andAmended: January 2007
The minimum information that should be assessed by an investment firm licenseeG to determine the suitability of an eligible third partyG should include but not be limited to the following information:(a) The eligible third party's credit rating, capital and financial resources;(b) The regulatory and insolvency regimes of the jurisdiction in which the eligible third party is located;(c) The eligible third party's reputation;(d) Its regulatory status and history; and(e) The other members of the eligible third party's group and their activities.Amended: January 2007
CL-6.1.2(a) The basis and terms governing the way in which the client assetsG will be held;(b) That the clientG is subject to the protection conferred by the client assetG protection rules and as a consequence:i. The clientG assets will be held separately from assets belonging to the investment firm licenseeG ; and(c) Whether interest is payable to the clientG and, if so, the terms and frequency of such payments;(d) That, notwithstanding that the client assetsG will benefit from the protections conferred by the client assetG protection rules, the clientG will still be taking unsecured credit risk on any bank or third party with whom the investment firm licenseeG places the client assetsG that it holds;(e) If applicable, that the client assetsG may be held in a jurisdiction outside the remit of the CBB and that the market practices, insolvency and legal regimes applicable in that jurisdiction may differ from the regime applicable in the CBB;(f) If applicable, that the investment firm licenseeG holds or intends to hold the client moneyG in a clientG bank account with a designated bank or in a third party account with an eligible third party which is in the same group as the investment firm licenseeG and the identity of the designated bank or eligible third party concerned;(g) If applicable, details about how any client moneyG arising out of Islamic financial business is to be held; and(h) Details of any claims or set offs which the investment firm licenseeG may have in client assetsG held on behalf of the clientG in satisfaction of a default by the clientG or otherwise, and any rights which the investment firm licensee may have to closeout or liquidate contracts or positions in respect of any of the client assetsG , without the client'sG prior instruction or consent.Amended: January 2007