The UK’s legislative framework for a digital securities sandbox will come into effect in January 2024. DSS is intended to enable existing financial market infrastructures and new entrants to experiment with developing technologies in securities market infrastructures within a more flexible legal and regulatory environment. The idea is to support models and structures that are not allowed by existing frameworks. Detailed rules and procedures will be published by the Bank of England and the Financial Conduct Authority in due course.
Legislative framework for UK’s first FMI sandbox
FSMA 2023 gave the UK Treasury the authority to create a Financial Markets Infrastructure (FMI) sandbox. This was to enable new FMI models and practices that are not permitted under existing legal and regulatory frameworks to be tested in a real-world environment.
Regulations for the first FMI sandbox, the Digital Securities Sandbox (DSS), have now been submitted to Congress and will take effect on January 8, 2024. These regulations create a legal framework within which the Bank of England and the Financial Conduct Authority adhere. We operate DSS.
The regulations and accompanying explanatory memorandum substantially reflect the Treasury’s proposals set out in the July 2023 consultation (as described in a previous blog post) and its November 2023 response. Key features are summarized below:
Scope Activities and Supporters
Activities in scope include:
- Notary, Payment and Maintenance services (e.g. functions currently performed by the Central Securities Depository (CSD)); and
- Trading post operation (Specifically, a Multilateral Trading Facility (MTF), Organized Trading Facility (OTF), or Recognized Investment Exchange (RIE)).
Activities include “technology development” (including but not limited to distributed ledger technology) in a manner that is not permitted under the prevailing legal and regulatory framework.
Only UK-established corporation You can participate in DSS as a sandbox participant. Accordingly, applications may be submitted by: recognized MTFs and OTFs, recognized CSDs and recognized investment exchanges (not foreign investment exchanges) and Others Regulatory authorities were permitted to participate.
The Treasury Department states that businesses seeking to perform notary, payment or maintenance services do not need to be fully accredited as a CSD to participate in the DSS, but instead “digital securities depository” Within DSS. On the other hand, sandbox participants run a trading post expected to demand full approval As a condition for conducting real-time activities within DSS. Exactly how this all works will have to be specified in the regulator’s rules.
The Treasury Department also stated that DSS is not mandatory and that “When existing requirements act as a barrier or obstacle to using new technology“.
Participation as sandbox participants is restricted to UK established entities, but the regulations do not restrict sandbox participants or non-UK established entities interacting with tools within scope.
tools in scope
The regulations provide: transferable securitiesIncludes debt securities and equity securities. currency market products and Unit of collective investment company It falls within the scope of DSS. Derivatives are not included in the scope.
Financial instruments transferred or settled by sandbox participants within DSS include: They are treated in the same way as equivalent tools. Outside DSS. This means, for example, that bonds issued within a DSS can be used as collateral by any market participant or in repo transactions.
May be imposed by regulatory authorities limit Information about the overall activities of DSS and individual sandbox participants. These limits are not fixed in the law to provide regulators with the flexibility to adjust and adjust the limits as appropriate.
Temporary Legislative Amendments
In the regulatory schedule, UK CSDR, FSMA 2000, Companies Act 2006 and Uncertified Securities Regulations 2001. If the regulations do not apply the law, the Bank of England and the FCA have the power to make rules on their behalf. You can also adjust amendments and waivers for specific participants.
Legislative amendments that apply to sandbox participants include: dependent on others Participates in the activities of sandbox participants, such as issuers and holders of securities recorded or traded within the DSS.
With respect to non-DSS activities, unless the law is expressly modified or applied, it generally continues to apply in its unmodified form. However, the Treasury said it was considering making the changes permanent. Financial Collateral Agreement Regulations and Payment Final Rule External to DSS to support the use of new technologies or models.
What happens next?
This regulation comes into effect from: January 8, 2024 to January 8, 2029. Treasury at least one year before expiration. report to the National Assembly (among other things) the efficiency and effectiveness of the sandbox arrangement, and whether the Treasury proposes permanent changes to the law to ensure that sandbox projects continue to have a permanent legislative footing (as authorized under FSMA 2023).
Although the establishment of a DSS legislative framework is an important milestone, Details about rules and procedures It is expected to be released by regulators in due course. The exact timing is not yet known, but with the five-year legislative period set to begin soon, there are many hopes that it will arrive soon.