How Does Safeguarding Work in More Than One Currency?

Key takeaways

• Relevant funds may be held in a currency other than the one received or owed, but CASS 15.3.3R then requires a daily adjustment.
• On each internal reconciliation day, the amount held must be at least equal to the original currency amount at the previous day's closing spot rate.
• External reconciliations compare balances currency by currency (CASS 15.8.47R).
• Funds for a currency exchange carried out independently of any payment service do not have to be safeguarded.
• The monthly return converts non-sterling amounts at the closing spot rate for the day before the relevant reconciliation.

What are the key facts on foreign currency safeguarding?

Firms may safeguard in a different currency from the one they owe, as long as they top up daily for exchange rate moves.

Can relevant funds be held in a different currency?

Yes, but the firm carries the exchange rate risk and must keep the amount held at least equal to what it owes in the original currency.

CASS 15.3.3R applies where a firm segregates relevant funds in a currency other than the one in which it received them or the one in which it owes them to clients. Each day it performs an internal safeguarding reconciliation, it must adjust the amount held so that it is at least equal to the original currency amount, translated at the previous day's closing spot exchange rate. Any gap is a shortfall to be paid in by the end of the day under CASS 15.8.50R.

The simplest way to avoid this exposure is to safeguard each currency in that currency. Firms that do convert, for example because they cannot open a safeguarding account in a minor currency, should treat the conversion as a deliberate decision, documented in the safeguarding policy, with the funding to support daily top-ups. The rule works in one direction only: the amount held must be at least equal to the original currency amount, so a favourable rate move creates an excess the firm may withdraw, while an adverse move creates a shortfall it must fund the same day. Over a year, the firm should expect to fund the adverse moves from its own resources before it can release any excess, and its capital planning should reflect that.

How are reconciliations performed across currencies?

The external reconciliation compares balances currency by currency, and the internal reconciliation covers every currency in each pool.

CASS 15.8.47R requires the external reconciliation to compare balances for each currency on bank and other accounts, and quantities of each relevant asset on custodian accounts. A firm cannot net a euro surplus against a dollar shortfall at the external stage. The Glossary definition of a reconciliation day also matters: for a reconciliation involving a non-UK market, a day on which that market is closed is not a reconciliation day. A firm safeguarding US dollars therefore does not have to perform the dollar external reconciliation on a US holiday, but it still reconciles sterling and euros that day. Our guide to CASS 15 reconciliation covers the method.

How is the requirement calculated in a multi-currency pool?

Calculate what is owed in each currency first, compare it with what is held for that currency, and only then convert for reporting.

The safeguarding requirement under CASS 15.8.30R is built from individual client balances. Where clients hold balances in several currencies, the firm should keep the requirement in each currency, so that it can see whether each currency is covered by money held in that currency or by a converted amount under CASS 15.3.3R. A single sterling total hides currency mismatches: a pool can look fully covered in sterling while one currency is short and another is in surplus.

Sterling conversion is then a reporting step. The monthly return is completed in sterling, and the firm converts each currency at the closing spot rate for the day before the reconciliation.

Which exchange rate should be used?

For the CASS 15.3.3R adjustment, the previous day's closing spot rate; for the monthly return, the closing spot rate for the day before the relevant reconciliation.

The two rules are consistent, since both use a closing spot rate fixed before the reconciliation. The firm should choose a single published source, apply it to every currency, and record it in its policy so that the reconciliation and the monthly safeguarding return use the same rates. PS25/12 added guidance on exchange rates to the return so that firms report on a consistent basis (PS25/12, chapter 4).

How does the daily adjustment work?

The worked example follows a payment institution that owes clients €2,000,000 and safeguards it in sterling.

On Tuesday the euro strengthened, so the sterling held no longer covered the euros owed. The firm paid in £16,000 the same day, as CASS 15.8.50R requires. On Wednesday the euro weakened and the firm withdrew the £12,000 excess, which it may do once the reconciliation shows it. Over the week the firm moved £28,000 to keep pace with a 1% swing in the rate; for a larger pool or a more volatile currency, the funding need grows in proportion, which is why the firm's funding forecast should include currency moves.

The same firm also safeguards US dollars in US dollars at a UK bank. On the Thursday, a US public holiday, it performs its sterling and euro reconciliations as usual. Because the dollar market is closed, Thursday is not a reconciliation day for the dollar external reconciliation, which it performs on Friday instead, with the holiday recorded in its calendar.

How does currency affect the D+1 deadline?

The D+1 deadline is the same in every currency, but payment calendars, cut-off times and time zones make it harder to meet.

A US dollar receipt that arrives late in the UK day may not be movable until the next US business day, and a holiday in the currency's home market can stop a transfer from settling. Where the firm converts before safeguarding, the conversion itself takes time to settle. Firms should plan these flows using a calendar for each currency and, where a deadline cannot be met with the relevant funds, fund the safeguarding account from their own money as CASS 15.8.51R requires. The deadline itself is set by EMRs regulation 21(2) and PSRs regulation 23(6).

Minor currencies raise a further issue: a firm may be unable to open a safeguarding account in that currency at all. Converting into a major currency under CASS 15.3.3R is then the practical route, with the daily adjustment and the funding it requires built into the operating model from the start.

Are funds for a currency exchange relevant funds?

Not where the exchange is carried out independently of any payment service; where it is part of a payment, the funds are received for a payment transaction and are relevant funds.

PS25/12 confirms that funds received for a foreign exchange transaction carried out independently of any payment service do not have to be safeguarded, and expects firms to keep evidence of the distinction, such as the customer's instruction (PS25/12, chapter 5). Where the exchange is one step in sending money to a payee, the money is received for the execution of a payment transaction and falls within the definition of relevant funds. Firms that offer both should be able to show, for each receipt, which service it was for.

How is currency risk on relevant assets managed?

CASS 15.4.6R(4) requires any foreign exchange risk on relevant assets to be prudently managed.

A firm that invests relevant funds in assets denominated in a currency other than the one owed must have a policy for that exposure, reviewed at least annually under CASS 15.4.6R(5). Our guide to investing relevant funds in secure, liquid assets covers the investment rules.

What should the safeguarding policy say about currencies?

It should state which currencies the firm safeguards, where and in what form, and how it handles any mismatch.

CASS 15.8.1R requires adequate policies for compliance with the safeguarding rules, and CASS 15.8.2G expects them to cover reconciliation frequency and method. For currencies, that means recording each currency received and owed, the account or asset in which it is safeguarded, any currency held under CASS 15.3.3R and why, the rate source and cut-off for the daily adjustment, the holiday calendars used to set reconciliation days, and who approves currency top-ups and withdrawals.

The policy should also set limits. A firm may decide, for example, that it will hold no more than a set share of any pool in a converted currency, or that conversions require approval by the individual responsible for safeguarding oversight. Limits like these turn a daily mechanical adjustment into a controlled business decision that the board has agreed.

What should a firm check?

These controls keep multi-currency safeguarding accurate.

• Record, for each pool, the currencies received, owed and held.
• Safeguard in the currency owed wherever possible, and document any exception.
• Apply the CASS 15.3.3R adjustment on every internal reconciliation day, using the previous day's closing spot rate.
• Use one published rate source for reconciliations and the monthly return.
• Reconcile each currency separately at the external stage, and keep a holiday calendar for each market.
• Keep evidence separating independent currency exchange from payment transactions.
• Include expected currency top-ups in the funding forecast.

How does Safeheld help?

Safeheld reconciles bank and ledger records for each entity and currency and applies the daily currency adjustment within the internal reconciliation.

Its 24-hour and 7-day funding forecasts include the top-ups that currency moves require, and transfers are routed for approval. See daily reconciliation and our CASS 15 and PS25/12 guide.

Frequently asked questions

Can a firm safeguard euros in sterling?

Yes. CASS 15.3.3R allows funds to be held in another currency, provided the amount held is adjusted on each internal reconciliation day to at least equal the euros owed at the previous day's closing spot rate.

Which exchange rate applies to the CASS 15.3.3R adjustment?

The previous day's closing spot exchange rate.

Are external reconciliations done in each currency?

Yes. CASS 15.8.47R requires balances to be compared currency by currency.

Is a foreign market holiday a reconciliation day?

Not for a reconciliation involving that market. The Glossary excludes days on which the relevant non-UK market is closed.

Do funds for a currency exchange need safeguarding?

Not where the exchange is carried out independently of any payment service. Where it is part of a payment, the funds are relevant funds.

What rate does the monthly return use?

Non-sterling amounts are converted at the closing spot rate for the day before the relevant reconciliation.

Can a surplus in one currency cover a shortfall in another?

Not at the external reconciliation, which compares each currency separately. Where funds are deliberately held in a different currency, CASS 15.3.3R governs how the amount held is measured against what is owed.

References

• FCA Handbook, CASS 15 Payment services and electronic money: safeguarding
• FCA Handbook, CASS 15.8 Records, accounts and reconciliations
• FCA Handbook, CASS 15.4 Segregation: secure, liquid assets
• FCA, PS25/12: Changes to the safeguarding regime for payments and e-money firms (PDF)
• FCA Handbook, SUP 16 Annex 29BR Safeguarding return

About Safeheld

Safeheld is reconciliation and regulatory financial control software for regulated firms that hold client money. It reconciles each entity and currency separately, applies the daily currency adjustment and forecasts the funding needed to keep every pool covered. To discuss your safeguarding operations, contact us at safeheld.com/contact.

This article is general information on the UK safeguarding rules and is not legal or regulatory advice.