Shearman & Sterling LLP | Financial Regulatory Developments Focus | Bank of England Provides Further Guidance on Settlement Finality Designation Post-Brexit
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  • Bank of England Provides Further Guidance on Settlement Finality Designation Post-Brexit
    The Bank of England has published the "Dear CEO" letter that it has sent to the Chief Executive Officers of EU CCPs, central securities depositaries and payment systems that are currently designated under the EU Settlement Finality Directive. The designation of these systems is automatically recognized in the U.K. under the SFD framework for automatic recognition, but the U.K. will fall outside the EU framework upon Brexit.

    The "Dear CEO" letter follows an earlier letter issued by the BoE in July 2018 and the publication, by HM Treasury, of a draft of the Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2018 on October 31, 2018. The draft Regulations will, once in force, empower the BoE to grant permanent designation to non-U.K. (including EU) systems that are not governed by U.K. law. They also establish a temporary designation regime for EU systems that are currently designated under the SFD.

    In the letter, the BoE sets out further details of the permanent designation of non-U.K. systems post-Brexit. It also sets out how EU systems can go about applying to enter the temporary designation regime in a "no deal" scenario (where the U.K. exits the EU without a ratified Withdrawal Agreement) in order to continue to benefit from U.K. SFD protection until the permanent designation process is complete.

    Permanent designation of non-U.K. systems

    SFD designation, and the U.K. Settlement Finality Regulations, are currently only available to persons established in the EU where at least part of the system's rulebook is EU law-governed. In the future, U.K. settlement finality protection will in principle be available to any non-U.K. system, regardless of its governing law and wherever its participants are established. Designation of systems by the BoE, and the requirements that designated systems will need to comply with, will be broadly similar to the procedures and requirements currently applying to U.K. law-governed systems, subject to this internationalization.

    Details of the application requirements for permanent designation are set out in the U.K. Settlement Finality Regulations, as amended by the draft Regulations.

    Systems that will need U.K. SFD designation post-Brexit

    It will not be a U.K. legal requirement for non-U.K. systems to obtain U.K. SFD designation in order to have U.K. participants. However, the BoE expects that EU systems may wish to apply for U.K. SFD designation where they have a participant or participants established in the U.K. or have a U.K.-established indirect participant or participants that fall within the meaning of participants set out in the SFD. This is because designation confers various important carve-outs from U.K. insolvency laws for designated systems that are likely to be of benefit to any system with U.K. participants. However, the regime will not be mandatory.

    The temporary designation regime

    EU systems wishing to benefit from the temporary regime in the event of a "no deal" scenario must notify the BoE ahead of Brexit. The draft Regulations establishing the regime have been published in draft form but are not yet approved by Parliament. In the letter, the BoE invites EU systems that wish to benefit from the temporary designation regime to indicate their intention to the BoE ahead of the draft Regulations coming into force. The BoE will treat such early notification by EU systems as formal notification under the new Regulations once they enter into force. The BoE stresses in the letter that it cannot treat responses to its previous "Dear CEO" letter in July as such a formal notification.

    The temporary regime will allow U.K. settlement finality protection for EU systems for three years following exit day. However, if an EU system wishes to seek permanent designation, it must make an application within the six-month period following exit day.

    Existing U.K. designated systems will simply continue to be designated in the U.K. without the need for any more. Such entities will face greater issues in terms of the risks of doing business with EU participants in future, since their U.K. designation would cease to have effect in the EU after Brexit and the EU has no third-country regime in place for SFD purposes.

    Non-EU systems that have no present U.K. settlement finality designation and wish to take advantage of the U.K.'s new third-country regime would have to submit a new application for U.K. SFD designation separately but would not be able to use the temporary designation regime.

    View the "Dear CEO" letter.

    View the July 2018 "Dear CEO" letter.

    View details of the Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2018.

    View ESMA's current list of EU systems designated under the SFD.

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