Title Transfer Collateral Arrangements – FSA takes away the punchbowl

Yesterday, in its quarterly consultation paper (CP 10/15), the FSA formally announced its intention to prevent investment firms using title transfer collateral arrangements (TTCAs) with retail clients.

TTCAs are utilised by derivatives firms that enter into margined transactions with clients – primarily contracts for differences (CFD) and spread betting firms in the context of retail clients. TTCAs allow those firms to treat margin (the amount paid by the client as collateral to open the position or bet) as their own working capital, rather than client money (which must be segregated). Often, those firms subsequently use that money to fund their hedging arrangements, or other business ventures. In the event of a firm’s insolvency, margin money that fell under a TTCA would be recoverable only on an unsecured creditor basis (rather than a ring-fenced trust basis), and might therefore be irrecoverable if the firm has no assets to distribute on insolvency.

Despite the fact that MiFID and the current FSA guidance appears to permit the use of TTCAs for all types of client, the FSA now views them as an unacceptable risk in the context of retail clients, who are not deemed to have the ability to understand the insolvency risk, and who should be therefore given better protection.

This move, which is part of a wider FSA programme to overhaul the client money rules and reduce the risk of irrecoverability of client money on a firm’s insolvency, is likely to have serious implications for the treasury arrangements of CFD and spread betting firms, and may have further unintended consequences.

For an analysis of FSA's proposals, including how these changes will impact on derivatives (CFD and spread bet) providers that are authorised as investment firms, please read our RegZone report.

To read CP 10/15 see here.

The client assets and living wills page on our Regzone contains more useful information relevant to this topic.