Treasury consults on first financial market infrastructure sandbox

Treasury is consulting on the first financial market infrastructure sandbox delivered under the powers granted to it as part of FSMA 2023. The Digital Securities Sandbox (DSS) will enable digital securities to be tested and ultimately adopted across financial markets.

In particular, the DSS will enable firms to set up and operate financial market infrastructures using innovative digital asset technology, performing the activities of a central securities depository (specifically notary, settlement and maintenance), and operating a trading venue, under a legislative and regulatory framework that has been temporarily modified to accommodate digital asset technology. These activities will be performed in relation to existing security classes (either digitally native issuances or digital representations of existing securities). Limits will be put in place for participants, which can be increased as progress is made, to reflect the ability of the entity to meet requirements and manage risks. The intention is that any digital securities issued, traded, settled and maintained via entities in the DSS will be able to interact with wider financial market activities (e.g. for collateral posting or repos), where this can be done in compliance with existing legislative and regulatory frameworks.

The proposed key features of the DSS are:

  • Temporarily modified legislation and rules;
  • A range of digital securities, both systemic and non-systemic, will be in scope. At a minimum, this will include a subset of “financial instruments” as defined in the RAO, digital bonds and equities, and digital versions of assets such as money market instruments. Treasury will consider other asset classes highlighted in responses;
  • Regulator-set limits on participating entities;
  • Both existing authorised firms and new entrants will be eligible to participate;
  • Proportionate regulation;
  • Interdependence with non-DSS activity – digital securities in scope of the DSS may be utilised outside, and other non-Sandbox activities can be performed provided this is compatible with existing regulatory or legal frameworks;
  • Agile and efficient approach to permanently changing legislation; and
  • Route for exiting and operating outside the DSS – Treasury intends that successful entities should be able to move to performing unrestricted activity outside the DSS, without any regulatory cliff-edges.

The consultation also invites respondents to formally express their interest in using the DSS on the basis that conversations with potential applicants should begin as early as possible.

The consultation closes on 22 August 2023.

Laura Wiles