Safeguarding of client assets and financial collateral; authorisation to issue statutory instruments

(1) An investment services undertaking that holds clients' funds must take appropriate arrangements to protect clients' rights and to prevent client funds from being used, without the client's express consent, for its own account or for the account of another person.
(2) An investment services undertaking must, without delay, hold client funds it receives in connection with an investment service or an ancillary investment service separately from the undertaking's own funds and from other clients' funds, in trust accounts with credit institutions, undertakings within the meaning of section 53b(1), first sentence of the Banking Act, or comparable institutions having their seat in a third country that are authorised to conduct deposit-taking business, a central bank, or a qualifying money market fund, until the funds are applied for the agreed purpose. The client may, by individual contractual agreement as regards the separation of client funds from one another, give other instructions, where it has been informed of the protective purpose pursued by the separation of client funds. For safekeeping with a qualifying money market fund, the investment services undertaking must obtain the client's prior consent. That consent is effective only where the investment services undertaking has, before the consent is given, informed the client that funds held with the qualifying money market fund are not held in accordance with the protective standards of this Act, nor in accordance with the regulation specifying the conduct-of-business rules and organisational requirements for investment services undertakings. The investment services undertaking must, before the safekeeping, disclose to the safekeeping institution that the funds are being deposited in trust. It must inform the client without delay of the institution and the account at which client funds are held, and whether the institution at which client funds are held belongs to an investor and depositor compensation scheme, and to what extent client funds are covered by that scheme.
(3) Where client funds are held with a credit institution, a comparable institution having its seat in a third country, or a money market fund belonging to the corporate group of the investment services undertaking, the funds held with such an undertaking, or a group of such undertakings, may not exceed 20 per cent of all client funds of the investment services undertaking. The Bundesanstalt may, on application, permit the investment services undertaking to exceed the upper limit under the first sentence, where it demonstrates that the requirement under the first sentence is disproportionate having regard to the nature, scale and complexity of its business, the security offered by the custodians referred to in the first sentence, and the low balance of client funds held by the investment services undertaking. The investment services undertaking reviews the assessment carried out under the second sentence annually and forwards its initial assessment and the reviewed assessments to the Bundesanstalt for examination.
(3a) Subsections (1) to (3) do not apply to funds of clients held by investment services undertakings possessing an authorisation for deposit-taking business within the meaning of section 1(1), second sentence, no. 1 of the Banking Act, held in the course of deposit-taking business under the Banking Act.
(4) An investment services undertaking that holds clients' financial instruments must take appropriate arrangements to protect clients' ownership rights in those financial instruments. This applies in particular in the event of the insolvency of the investment services undertaking. The investment services undertaking must, through appropriate arrangements, prevent a client's financial instruments from being used, without the client's express consent, for its own account or for the account of another person.
(5) An investment services undertaking without an authorisation to conduct custody business within the meaning of section 1(1), second sentence, no. 5 of the Banking Act, or without authorisation to safe-keep and administer financial instruments for others under section 2(3), no. 1 of the Securities Institutions Act, must forward, without delay, securities it receives in connection with an investment service or an ancillary investment service for safekeeping to a credit institution authorised to conduct custody business domestically, a securities institution authorised to safe-keep and administer financial instruments domestically under section 2(3), no. 1 of the Securities Institutions Act, or an institution having its seat abroad that is authorised to conduct custody business and under which the client is afforded a legal position equivalent to that under the Custody Act. Subsection (2), sixth sentence, applies correspondingly.
(6) The investment services undertaking may use a client's financial instruments for its own account or for the account of another person only under precisely defined conditions, and must take appropriate arrangements to prevent the unauthorised use of a client's financial instruments for its own account or for the account of another person. The client must have given express prior consent to the conditions, and that consent must be clearly documented by the client's signature or an equivalent written confirmation. Where the financial instruments are held in omnibus accounts with a third party, a use under the first sentence additionally requires either the express consent of all other clients of the omnibus account, or systems and control mechanisms ensuring that use is restricted to financial instruments for which consent under the second sentence has been given. In the cases under the third sentence, the investment services undertaking must keep records of the clients on whose instructions financial instruments are used, and of the number of financial instruments used by each individual client with that client's consent, that enable losses arising from the use to be clearly and accurately attributed.
(7) An investment services undertaking may not accept from retail clients, as collateral or cover for the client's obligations, even where those obligations do not yet exist, financial collateral in the form of title transfer arrangements within the meaning of Article 2(1)(b) of Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (OJ L 168, 27.6.2002, p. 43), as last amended by Directive 2014/59/EU (OJ L 173, 12.6.2014, p. 190), as amended.
(8) Insofar as a title transfer arrangement is permissible, the investment services undertaking must properly assess the appropriateness of using a financial instrument as financial collateral, having regard to the client's contractual relationship with the investment services undertaking and the client's assets, and must document that assessment. Professional clients and eligible counterparties must be alerted to the risks and consequences of providing financial collateral in the form of a title transfer arrangement.
(9) An investment services undertaking must, in connection with securities lending transactions with third parties involving clients' financial instruments, ensure, through corresponding agreements, that the borrower of the client's financial instruments provides appropriate collateral. The investment services undertaking must ensure the appropriateness of the collateral provided through suitable arrangements, must continuously monitor it, and must maintain the balance between the value of the collateral and the value of the client's financial instrument.
(10) The Federal Ministry of Finance may, by statutory instrument not requiring the consent of the Bundesrat, adopt, for the protection of client funds or securities entrusted to an investment services undertaking, further provisions on the scope of the obligations under subsections (1) to (9), and on the requirements applicable to qualifying money market funds within the meaning of subsection (2). The Federal Ministry of Finance may transfer this authorisation, by statutory instrument, to the Bundesanstalt.