The Financial Services Authority has issued proposals for changes to the client money and custody assets regime for investment firms.

In addition to changes required by the European Markets Infrastructure Regulation, the FSA proposes changes that could lead to a radical shift in how firms protect client money. It also seeks comment on some wider issues with the aim of producing better results in insolvencies.

One of the measures introduced by EMIR will require central counterparties, or clearing houses, in the event of the default of a clearing member, to try to "port" (i.e. transfer) the positions and margin of the failed clearing member’s clients to a back-up clearing member or return any balance. This will allow clients to either carry on trading or see their positions closed and money returned.

These changes mean that, when a firm fails, some client margin held in a client transaction account at a CCP, instead of being pooled and then distributed to clients as happens now, could be excluded from pooling to allow porting or repayment to the clients directly. The FSA is proposing these amendments so that its rules will be compatible with EMIR.

The FSA also proposes to bring in rules that extend similar options to all client money held by all firms in relation to investment business. This will be done by the introduction of multiple client money pools, the most radical change to the client money regime in over 20 years.

It will permit firms to create multiple client money sub-pools in relation to any investment business, with the discretion left to the firm and the clients to determine the basis.

The final paper provides an overview of the fundamental review of the client money and custody assets regime that the FSA has started, aimed at improving the regime in the insolvency of a firm, although insolvency law is determined by primary legislation and not the FSA rules.