Laura WilesFollowing a joint consultation on creating a Digital Securities Sandbox (DSS), the FCA and BoE have published a policy statement setting out their approach to safely adopting new technologies in the operation of financial market infrastructure.
The DSS is the first Financial Market Infrastructure sandbox created under powers conferred on HMT by FSMA 2023, and will facilitate the use of developing technology, such as distributed ledger technology, in the issuance, trading and settlement of securities by allowing firms to operate under a temporarily modified legal and regulatory framework. The DSS is currently open to applications.
In particular, the DSS will allow participants to undertake notary, maintenance and settlement activities traditionally associated with central securities depositories (CSDs) and combine these with the operation of a trading venue. DSS activity will be ‘live’, but to protect financial stability however, limits will be placed on the value of securities issued into the DSS.
The regulators highlight that Digital Securities Depositories (DSDs) are not required to meet the same standards or requirements as a CSD, so the level of service or protections offered might differ from those that a user would expect of a CSD. The regulators therefore adviser users to be aware of this difference in risk, and expect a higher risk of failure and operational disruption relative to activity outside of the DSS. However, any broader, systemic disruption will be contained as long as DSDs stay within their limits and are able to appropriately manage risks created through linking into the financial system. BoE will supervise DSDs to achieve this.
Although the DSS is a temporary regime, the regulators and HMT are keen that that it “should not be a bridge to nowhere”. FSMA 2023 allows the government to legislate for a permanent regime, after reporting to Parliament, so the regulators highlight that a smooth transition should be available for successful sandbox entrants into any permanent regime introduced when the DSS closes.
The policy statement is published alongside:
- a joint FCA / BoE application form for Gate 1 (entry into the DSS);
- a BoE draft Gate 2 application form for firms seeking to be approved as a DSD;
- guidance on the operation of the DSS; and
- the BoE DSS Rules instrument, which covers requirements applicable to DSDs at the go-live stage of the DSS, once firms have passed Gate 2.