Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Legislation Published to Preserve Settlement Finality Designation Post-Brexit
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  • UK Legislation Published to Preserve Settlement Finality Designation Post-Brexit
    10/31/2018
    HM Treasury has published a draft of the Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2018. These draft Regulations introduce changes across various pieces of legislation relevant to financial market infrastructure to implement Brexit, namely the Settlement Finality Regulations, the Companies Act 1989, the Financial Collateral Arrangements (No.2) Regulations and the Banking Act 2009, so that U.K. domestic law concerning financial market infrastructure insolvency can continue to operate effectively after the U.K. leaves the EU.

    The draft Regulations are designed to maintain legal certainty for EU systems that conduct business with U.K. participants, by providing for the continuation of U.K. settlement finality protections currently provided under the Settlement Finality Directive.

    The SFD establishes various insolvency carve-outs for designated market infrastructure systems and provides for finality of transactions within such systems. Under the protections currently afforded by the SFD (implemented in the U.K. by the Financial Markets and Insolvency (Settlement Finality) Regulations 1999), transfer orders which enter into designated systems within certain deadlines are guaranteed to be finally settled and cannot be unwound at the behest of insolvency officials, regardless of whether the sending participant has become insolvent or transfer orders have been revoked in the meantime. This also gives certainty as regards holdings in central securities depositories and as to the finality of transactions in some clearing and payment systems.  Under the SFD, each EU Member State automatically recognizes systems that have been designated by other Member States. However, on the U.K.'s withdrawal from the EU, the U.K. will no longer fall within the SFD framework for automatic recognition and, without more, EU systems would not be recognized in the U.K.

    The draft Regulations will allow designations to be made, under domestic law, of non-U.K. financial market infrastructures, including FMIs outside the EU. The Bank of England is empowered under the draft Regulations to grant permanent designation to non-U.K. FMIs and non-U.K. central banks.

    The draft Regulations provide for a temporary designation regime to enable EU systems currently designated under the SFD to be grandfathered into U.K. SFD protections upon Brexit, in advance of permanent designation being granted. The temporary designation regime will last for three years from exit day, with a power for HM Treasury to extend the regime by no more than 12 months at a time if it is necessary and proportionate to avoid disruption to U.K. financial stability. Any system that has protections under the Settlement Finality Regulations at the point of the U.K.’s exit from the EU will not have to reapply for designation from the BoE. Such systems will continue to receive these protections under U.K. law after Brexit. Furthermore, protections under the existing SFRs will continue to apply to transactions entered into prior to exit day.

    The BoE will maintain a public list of systems (and central banks) that are within the U.K. SFRs, the temporary regime and the non-U.K. regime.

    In July 2018, the Bank of England sent a "Dear CEO" letter to the operators of systems currently designated under the SFD, explaining that the BoE anticipated that the U.K. legislation would, in essence, impose the same designation requirements as are currently required under the U.K. legislation implementing the SFD. The BoE outlined in the Dear CEO letter how it envisaged the designation process would take place, the requirements for, and the effect of, obtaining temporary U.K. designation and which systems would need U.K. designation post-Brexit.

    The draft Regulations also make a number of technical changes to other pieces of legislation mentioned in the first paragraph, in order to implement Brexit in a U.K. context and remove certain preferential statuses afforded to EU systems or market infrastructure in situations where the same are not recognized in the U.K. under relevant temporary permission or post-Brexit authorization or recognition regimes.

    View the draft Regulations.

    View the explanatory information.

    View the BoE's July 2018 "Dear CEO" letter to EU systems.

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