UK Plans Temporary Designation Regime for Settlement Finality Designation Post-Brexit
07/24/2018The U.K. Government has announced that it intends to legislate to ensure, after U.K. withdrawal from the EU, the continuation of U.K. settlement finality protections currently provided under the Settlement Finality Directive and implemented in the U.K. by the Financial Markets and Insolvency (Settlement Finality) Regulations 1999. The SFRs establish various insolvency carve-outs for designated market infrastructure systems and also legislate for finality of transactions within such systems. However, only EU systems are in scope.
The SFD requires Member States to notify the European Securities and Markets Authority with information concerning the national systems (and the respective system operators) they have designated to be included within the scope of the SFD protections. Member States must also designate the national authorities that must be notified when insolvency proceedings are opened against a participant or a system operator. Under the protections afforded by the SFD, transfer orders which enter into designated systems within certain deadlines are guaranteed to be finally settled, regardless of whether the sending participant has become insolvent or transfer orders have been revoked in the meantime. Under the SFD, each Member State automatically recognizes systems that have been designated by other Member States.
On the U.K.'s withdrawal from the EU, the U.K. will no longer fall within the SFD framework for automatic recognition. To maintain legal certainty for EU systems that conduct business with U.K. participants, HM Treasury proposes to legislate to allow designations, under domestic law, of non-U.K. financial market infrastructures, including FMIs outside the EU. It also proposes to give the Bank of England functions and powers to grant permanent designation to non-U.K. FMIs. This proposed new legislation is noteworthy in that it may be the first example of post-Brexit legislation that not only addresses Brexit issues but arguably promotes the U.K. Government's vision of a "global Britain". Settlement systems around the world will potentially be capable of being afforded the same insolvency law and finality protections under U.K. laws as are afforded to EU systems—something that the EU has omitted to achieve during the almost two-decade long life of the SFD to date, despite this being a widely-known deficiency in the legislation. Furthermore, the proposed legislation will provide for a temporary SFD designation regime that would enable EU systems currently designated under the SFD to be easily grandfathered into benefitting from SFD protections upon Brexit, in advance of permanent designation being granted.
Permanent designation for non-U.K. FMIs will only be needed by the end of the transitional, or "implementation," period (March 29, 2019 to December 31, 2020) which has been agreed in principle between the U.K. and the EU and which will need to be ratified under the Withdrawal Agreement currently under negotiation. The temporary designation regime is designed to act as a backstop in the event of a "no deal" scenario, in which the implementation period is not ratified under the Withdrawal Agreement. The legislation will maintain legal certainty for EU systems that conduct business with U.K. participants, whatever the outcome of negotiations between the U.K. and the EU.
The Bank of England has written a "Dear CEO" letter to the operators of systems currently designated under the SFD, explaining that the BoE anticipates that the forthcoming U.K. legislation will, in essence, impose the same designation requirements as are currently required under the U.K. legislation implementing the SFD. The BoE outlines in the Dear CEO letter how it envisages the designation process will 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 BoE encourages the operators of affected systems to engage in pre-application discussions with it by replying to the letter and indicating whether their systems will continue to need the protections afforded by designation following Brexit.
View the announcement from HM Treasury.
View the BoE "Dear CEO" letter to EU systems.