Consultation outcome

Consultation on implementing CSDR

Updated 11 September 2017

This was published under the 2015 to 2016 Cameron Conservative government

1. Introduction

This document seeks the view of interested stakeholders on the proposed changes to domestic legislation following the publication of the Central Securities Depositories Regulation (Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories, referred to as CSDR). We are also seeking the views of interested parties on the issues set out in this document.

Chapter 1 explains why the government is required to make changes to domestic legislation. Chapter 2 features the main body of the consultation where the key proposals are discussed. It is here where we set out the specific questions on which we are seeking views. A summary of questions is in Chapter 3. Following this, information on how to respond to this consultation is available in Chapter 4. Chapter 5 features a glossary of terms used in this document.

1.1 The subject of this consultation

Central Securities Depositories (CSDs) are systemically important financial market infrastructures that support the issuance, safekeeping and settlement of securities. CSDR – a directly applicable EU regulation – provides a harmonised regulatory and prudential regime for CSDs, harmonises and increases the robustness and resilience of securities settlement arrangements, and creates a single market for CSD services. It does this by:

• Establishing the core and ancillary services that a CSD can provide;
• Establishing new common rules for the authorisation and ongoing supervision of CSDs;
• Setting prudential, technical, legal and organisational requirements for the operation of CSDs and their services;
• Harmonising securities settlement rules, including the introduction of a settlement discipline regime; and,
• Establishing common access rules to support the creation of a competitive single market in securities settlement services.

CSDR was published in the Official Journal of the European Union (OJEU) on 28 August 2014 and came into force 20 days later. At this point not all of its provisions applied. Many of CSDR’s requirements only apply once regulatory and implementing technical standards (RTS and ITS, respectively) and delegated acts (DAs) have been published, and CSDs themselves have been authorised.

The government has amended UK domestic legislation, through the Central Securities Depositories Regulations 2014 (the 2014 Regulations), in order to fulfil its obligations at the time CSDR was published in the OJEU. The 2014 Regulations designated competent authorities relevant to the provisions of CSDR active at that time. CSDR’s level two measures (that is the ITS, RTS, and DAs) are anticipated to be agreed and published in the OJEU in early 2016. The government must ensure that domestic legislation is compatible with the provisions of CSDR which will apply once level two is in place. This has prompted the need to make additional amendments to domestic legislation – the subject of this consultation.

Amendments to domestic legislation are necessary in order to ensure that provisions of domestic law overlapping with CSDR are disapplied, powers for enforcement are provided for, and changes are made to acknowledge the requirements of CSDR. The current draft statutory instruments (SIs) are attached to this document in Annex A and Annex B. Two SIs are required for the amendments to be effective, as they amend different pieces of legislation and follow separate processes. The proposed changes will not be covered in Chapter 2 in the order that they appear in those SIs, but rather they will be addressed thematically.

This consultation paper is broad in its scope, reflecting the many changes that CSDR brings and seeks to address many of the remaining provisions and requirements yet to come into effect. However, this consultation paper will not address CSDR Article 3(1) requirements relating to the book-entry form recording (also known as dematerialisation) of transferrable securities admitted to trading. This will be addressed in a separate consultation from the Department of Business, Innovation and Skills. Article 3(1) sets a deadline of 1 January 2023 for dematerialisation of new issues of transferable securities and 1 January 2025 for all transferable securities. However, there may be a case for bringing dematerialisation forward. As such, the Department for Business, Innovation and Skills shall consult on options for implementing the requirements.

1.2 Who should read this?

CSDR places requirements on CSDs established in the UK and other EEA States, settlement internalisers, credit institutions providing banking-type ancillary services to a CSD’s participants, and other entities including central counterparties (CCPs) and trading venues – those are regulated markets, multilateral trading facilities (MTFs) and organised trading facilities (OTFs), as defined in Directive 2014/65/EU). It is therefore recommended that CSDs, CCPs, trading venues and any entities that provide internalised settlement read the relevant sections of this consultation paper.

A settlement internaliser is defined by CSDR as “any institution, including one authorised in accordance with Directive 2013/36/EU or with Directive 2014/65/EU, which executes transfer orders on behalf of clients or on its own account other that through a securities settlement system”. Directive 2013/36/EU is commonly known as the Capital Requirements Directive 4 (CRD4), and Directive 2014/65/EU is commonly known as the Markets in Financial Instruments Directive 2 (MiFID 2).

2. Changes to domestic legislation

This Chapter is split into several sub-sections to address various areas where amendments are proposed, and where issues have been raised to invite the views of interested parties. These take a thematic view of topics and do not follow the order of draft legislative amendments in the annexed SIs. A full list of the questions featured in this Chapter is included in Chapter 3.

2.1 Section 1: Competent authorities

Immediately following the publication of CSDR in the OJEU in 2014, the 2014 Regulations designated competent authorities for CSDR purposes with a view to ensuring that a competent authority was designated for all CSDR provisions applicable at that time. Now with the level two measures expected to be published in the OJEU in early 2016 further designations are required. Annex A contains the SI with the relevant amendments referred to in this section, specifically regulation 7(3) in Part 5: ‘Amendments to the Central Securities Depositories Regulations 2014’.

The UK is required to designate a competent authority for other CSDR competent authority functions in relation to CSDs which might not strictly be classified as “authorisation and supervision”. For example, functions under Article 7 of CSDR, and in relation to host competent authority functions as regards EEA CSDs, as contemplated by Article 24 of CSDR. Article 25 of CSDR also necessitates the designation of a competent authority in relation to third country CSDs, see for instance Article 25(6) and (7). In addition to this, a designation is required with respect to the supervision of settlement internalisers, investment firms and CCPs for the purposes of CSDR Article 9.

The government wishes to ensure that any changes stemming from the requirements of CSDR build on pre-existing practices, capitalise on the expertise and infrastructure already in place, and avoid duplication. As such, the government proposes that the Financial Conduct Authority (FCA) be designated as the competent authority for supervising investment firms for CSDR purposes, to the extent that investment firms have functions under CSDR. For example, see Article 6(2) of CSDR. This is in line with existing practice, as the FCA are already the relevant competent authority for the Markets in Financial Instruments Directive – the EU legislation that regulates investment services and activities.

In line with this approach, the government also proposes that the Bank of England be designated as the competent authority for enforcing the relevant requirements of CSDR related to settlement internalisers, and CCPs. The Bank of England is already designated as the competent authority for CSDs in the 2014 Regulations, as well as for CCPs for the purposes of the European Market Infrastructure Regulation (Regulation EU 648/2012 known as “EMIR”). Article 9 of CSDR requires settlement internalisers to report transactions settled outside a securities settlement system, and the government considers that the Bank of England is best placed to take on responsibilities in relation to such reports.

 Question 1

Do you agree with the designations set out above? If not, please provide your reasons for this to help us understand your view.

In order for the designated authorities to be suitably equipped to enforce the requirements of CSDR for which they are responsible, several powers are proposed to be extended for this purpose. These amendments will be highlighted in the relevant sections that follow.

2.2 Section 2: Settlement internalisers

A settlement internaliser is defined by CSDR as “any institution, including one authorised in accordance with Directive 2013/36/EU or with Directive 2014/65/EU, which executes transfer orders on behalf of clients or on its own account other that through a securities settlement system”. Examples of settlement internalisers may include custodian banks and large stockbrokers. Amendments highlighted in this section are found in regulation 2(37)(w) in Part 2 (amendments to the Financial Services and Markets Act 2000) and Part 5: ‘Amendments to the Central Securities Depositories Regulations 2014’ of Annex A.

Under Article 9 of CSDR, a settlement internaliser is required to report to its competent authority (proposed to be the Bank of England) the aggregated volume and value of all securities transactions that they settle outside securities settlement systems on a quarterly basis. In order for the Bank of England to ensure that settlement internalisers are properly identified and are meeting the requirements set out in CSDR, the powers that we proposed to provide the Bank of England are taken in turn below.

In its role as the competent authority for settlement internalisers, the Bank of England is to be provided (under regulation 5A inserted by regulation 7(5)) with the power to verify whether a person has complied with the requirements of Article 9(1) of CSDR and to determine whether a person is or is not a settlement internaliser. These provisions are similar to the power of the FCA to require information from a party to a financial collateral arrangement who is not authorised under the Financial Services and Markets Act 2000 (FSMA) (as in regulation 3 of the 2014 Regulations).

The Bank of England is also provided with the power to impose penalties and publish statements (under the proposed regulation 5B). These can be applied where a settlement internaliser contravenes CSDR or a requirement imposed upon it by the Bank of England where it is seeking to make verifications in line with regulation 5A. The Bank of England may also take similar action if it considers a settlement internaliser knowingly or recklessly provided information which is false or misleading in a material manner.

Regulation 5C sets out the procedure applicable in respect of regulation 5B. This includes a right of reference to the Upper Tribunal where the Bank of England has taken action against a person under regulation 5B.

This suite of powers is intended to provide the Bank of England with the means to identify settlement internalisers and where necessary to impose penalties on those settlement internalisers that fail to comply with the CSDR. The government has taken the view that this should provide sufficient deterrence to ensure compliance with CSDR.

A proposed amendment to paragraph 36(1) of Schedule 17A to FSMA gives the Bank of England the power to charge fees to settlement internalisers in connection with the discharge of its functions under or as a result of CSDR. The current draft does not extend the Bank of England’s power to set fees for the purpose of meeting expenses incurred in preparation for the exercise of Bank powers under CSDR. It is thought that paragraph 36(1) may not be sufficient to enable the Bank of England to recover the costs of setting up the necessary systems for reporting by settlement internalisers. Consultees are asked to consider whether paragraph 36(2) should be amended to address this issue.

 Question 2

Do you agree with the provision of powers to the Bank of England in support of its function under Article 9 of CSDR with respect to reporting by settlement internalisers, as drafted in Annex A? If not, please provide your reasons for this to help us understand your view.

Question 3

Should paragraph 36(2) of Schedule 17A to FSMA be amended to permit the Bank of England to recover costs of setting up the necessary systems for reporting by settlement internalisers?

Further to the above proposed amendments, the government is considering whether additional powers should be extended to the Bank of England in its role as the relevant competent authority for settlement internalisers.

The first power would replicate section 166 of FSMA. It would permit the Bank of England to impose additional requirements on a settlement internaliser to provide documents and information, and also to require a skilled person to prepare a report, for example into why the settlement internaliser is repeatedly reporting incorrect information or submitting reports beyond the required deadline. This would enable the Bank of England to investigate the cause of any contravention of CSDR by a settlement internaliser and not rely solely on information supplied by the settlement internaliser together with the power to apply a penalty for failure to comply.

In addition, a provision replicating section 166A of FSMA might also be included in the SI. This would permit the Bank of England to appoint a skilled person to collect and update information, where the settlement internaliser has failed to do this itself, and to charge a fee for doing so.

 Question 4

Do you believe that the Bank of England should be given powers equivalent to sections 166 and 166A of FSMA in its role as the competent authority for settlement internalisers?

2.3  Section 3: Recognised CSDs and authorisation

Authorisation and recognition

CSDR introduces a requirement on CSDs to apply for authorisation in order to be permitted to provide certain services specified in the Annex to CSDR. The CSDR’s level one text and subsequent RTS and ITS on this matter set out how the authorisation process will be applied. In consequence, the government needs to ensure that overlapping domestic requirements are removed and that powers are extended where necessary to permit the Bank of England as the competent authority for CSDs to fulfil its role.

In order to give UK based CSDs authorised under CSDR and authorised EEA (or third country) CSDs exempt person status under FSMA (so that they can carry on FSMA regulated activities without the need to obtain authorisation as an “authorised person”), the government proposes to amend Part 18 of FSMA.

At present the UK’s only CSD, Euroclear UK and Ireland Limited (EUI, is recognised as a recognised clearing house (RCH)). EUI shares the RCH category with another four entities, all of which are CCPs. In a recent government call for evidence on RCHs, launched in March 2014, all the respondents supported the creation of a new recognised body category specifically for CSDs. The government proposes the creation of a new recognised body category in Part 18 of FSMA; a recognised central securities depository (RCSD). Creating a new category would better reflect the differences between CSDs and CCPs. The amendments to domestic legislation that make this change can be found in Annex A, Part 2: ‘Amendments to the Financial Services and Markets Act 2000’. Consequential amendments to primary legislation reflecting the creation of a new category of recognised body are found in Part 1 of the Schedule to the SI at Annex A. Before the SI is made, consequential amendments on similar lines to secondary legislation will be added in.

Consultees’ attention is drawn to new section 313(1A) of FSMA which is intended to make it clear that CSDs are distinct from clearing houses. Section 285(1)(b) of FSMA which is the definition of “recognised clearing house” is not amended, but should be read with section 313(1A) in mind.

The RCSD category will provide an exemption from the general prohibition in section 19 of FSMA in connection with services in Sections A and B of the Annex to CSDR that a CSD is authorised to provide under its CSDR authorisation. The exemption, proposed to be included as section 285(3D) of FSMA, also covers non-banking-type ancillary services notified under Article 19(8) of CSDR. In the consultation draft it covers any MiFID investment services or activities (which are not covered by Section A or B of the Annex to CSDR) for which the CSD is authorised. However, the government is considering whether CSDR permits a CSD to provide MIFID investment services or activities in addition to those covered by Section A or B of the Annex to CSDR, and if the view is taken that it does not, it is proposed to remove paragraph (c) of section 285(3D).

However, a RCSD will not be exempt from the general prohibition with respects to any banking-type ancillary service listed in or permitted under Section C of the CSDR Annex that constitutes a regulated activity in the UK. An RCSD would still need to become an authorised person. Section 285(3H) contains a carve-out for banking-type ancillary services.

Section 285(3E) and (3F) provide exempt person status for EEA CSDs. Subsection (3F) and amendments to article 72 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 in the Schedule to the SI at Annex A aim to prevent EEA CSDs which have not complied with the requirements of Article 23 of CSDR from taking advantage of the FSMA exemption. Section 285(3G) provides exempt person status for third country CSDs recognised by ESMA (the European Securities and Markets Authority) under Article 25 of CSDR. Third country CSDs providing services in the UK under Article 25(1) of CSDR who do not require ESMA recognition under Article 25(2) should continue to be able to make use of the “overseas persons” exemption in article 72 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

RCSD status is applied for when an application to be authorised as a CSD under CSDR has been submitted to the Bank of England (see new section 288A of FSMA). This will avoid any excess requirements being placed on the applicant CSD in terms of having a separate process for recognition in the UK. In the government’s amendments to domestic legislation following the implementation of EMIR, the same approach was taken with CCPs. CSDR does not permit further information to be required in a CSD’s authorisation application outside of that detailed in the level two measures. Therefore the current ability of the Bank of England to require additional information in relation to an application (section 289 of FSMA) is proposed to be amended such that this power is not available, except in relation to the few recognition requirements for CSDs which do not derive from CSDR. These are described here. The government deems this as a necessary step to ensure the requirements of being authorised in the UK do not go beyond those required under CSDR and are not excessive.

Where the Bank of England authorises an applicant CSD under CSDR, a “CSD recognition order” will be granted declaring the applicant a RCSD. New section 290(1E) lists what the recognition order will set out. The recognition order will specify the core services the CSD is authorised to provide (as listed in Section A of the CSDR Annex). In addition to this, it will specify any additional non-banking type ancillary services the CSD is permitted to provide (as set out in Section B of the CSDR Annex), including services that have been notified to the Bank of England that do not require authorisation. If MiFID investment services and activities outside the scope of Sections A and B of the Annex to CSDR are listed as a separate category in section 285(3D) (as set out here they should also be listed in the recognition order. Further, it is proposed that the recognition order specifies which activities are permitted to be out-sourced where they are a core service under Section A of the CSDR Annex, and any CSD link that the successful applicant is authorised to maintain. Using the recognition order to record the CSDR authorisation mirrors the approach taken in the implementation of EMIR (where the recognition order documents the scope of the EMIR authorisation).

New section 290(4A) and (4B) provide a right of appeal to the Upper Tribunal where the Bank of England has not made a decision in relation to a complete application within 6 months. This gives effect to requirements of Articles 17 and 66 of CSDR.

CSDR also permits a CSD to seek authorisation for additional services set out in the Annex to CSDR after its initial authorisation. Authorisation for specific services can also be withdrawn selectively in line with the processes set out in CSDR, for example where the authorisation requirements are no longer met. This means that the recognition order may need to be changed after it has been made. The variation of a CSD recognition order is not provided for in Part 18 of FMSA and therefore new section 290ZB is proposed, in order to enable CSDR Articles 19(1), (5), (8) and 20(4) to be given effect.

New section 297(1B) of FSMA provides that the Bank of England only has power to issue a revocation order removing RCSD status in accordance with Article 20 of CSDR. Where a revocation order is made, the Bank of England must in addition to providing reasons before a final decision is taken, and making it possible for representations to be made, and provide a reasoned decision. This measure is to ensure compliance with Article 66 of CSDR. The section 290A of FSMA power to refuse an authorisation on the grounds of excessive regulatory provision has been disapplied due to inconsistency with Article 17 of CSDR.

The authorisation (and revocation of authorisation) procedure in CSDR is subject to the CSDR’s Article 66 provision of a right of appeal. So in FSMA a right of appeal to the Upper Tribunal is supplied where a recognition order is refused or revoked. In the case of revocation orders, this is achieved through an amendment to section 298 of FSMA.

There are other minor amendments to section 298 of FSMA in respect of revocation orders and directions to achieve consistency with CSDR. Section 298, as proposed to be amended, provides for a period to be allowed for representations to be made in the case of a direction to an EEA CSD in the circumstances in the second sub-paragraph of Article 24(5) of CSDR. Since by this stage there will have been persistent breaches of CSDR, we invite views from respondents on whether the period for representations should be retained in these circumstances?

Section 291 (liability in relation to recognised body’s regulatory functions) will continue to apply in relation to RCSDs (who will be recognised bodies) without a specific amendment. It is the government’s view that section 291 falls outside the scope of CSDR and to retain this section would be consistent with the government’s previous approach in implementing EMIR. We nonetheless wish to understand the views of respondents on this issue. Section 291 only refers to functions under FSMA. When EMIR was implemented, section 291(3) was not extended to functions under EMIR and this approach has been followed for CSDR implementation. Do respondents agree with this approach?

Question 5

Do you agree with the proposed approach of creating a new recognised body category – a recognised central securities depository?

Question 6

Do you believe the proposed scope of the exemption in section 285(3D) and the recognition order in section 290(1E) for RCSDs to be suitable? Specifically, should the recognition order record any authorisation under Article 54(2)(a) or (b) of CSDR, and list the ancillary banking services to which its authorisation relates, even though the CSD does not benefit from the FSMA exemption in section 285 for banking services? Do you consider that having outsourced activities and CSD links listed in the recognition order, but not explicitly mentioned in the section 285 exemption, would cause confusion?

Question 7

Is the scope of the exemptions for EEA and third country CSDs appropriate?

 Question 8

Where the second sub-paragraph of Article 24(5) of CSDR applies in relation to an EEA CSD, should the Bank of England be obliged under section 298 of FSMA to allow a period for representations before giving a direction to the EEA CSD? Should the period for representations be retained in circumstances where EEA CSDs have persistently breached CSDR, as discussed here?

 Question 9

Do you agree that section 291 of FSMA need not be amended?

Consequential amendments to the recognition requirements

In light of these proposed changes, amendments are required in the Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001 (RRRs). The amendments proposed to these Regulations are found in Annex A, Part 4: ‘Amendments to the Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001’.

The creation of the RCSD category of recognised body requires consequential amendments to the RRRs. Most provisions of the RRRs will no longer apply to RCSDs by virtue of the fact that RCSDs will not be RCHs, in particular regulation 5 and Parts 5 and 6 of the Schedule (the recognition requirements for clearing houses which are not CCPs). Carving RCSDs out of the RCH category disapplies these measures without the need to do so explicitly. In their place a new regulation 5B is introduced which directs us to the new recognition requirements for RCSDs (the new Part 7 of the Schedule). Regulation 6, which is not consistent with CSDR, is disapplied entirely.

New Part 7 of the Schedule to the RRRs sets out the recognition requirements for CSDs. The main requirement is to meet the requirements of CSDR and any directly applicable EU regulation made under it (paragraph 37). Also included is the requirement for a CSD to ensure appropriate measures are adopted to reduce the extent to which its facilities can be used for a purpose connected with market abuse or financial crime (paragraph 38). This measure is outside the scope of CSDR and is in place to safeguard the interests of the public. Paragraph 39 transposes Article 34 of MiFID and may need to be updated when MiFID 2 replaces it. Paragraph 40 implements Article 65(3) of CSDR, relating to procedures for the reporting of infringements by employees. Paragraph 41 implements the second sub-paragraph of Article 73 of CSDR for CSDs providing investment services and activities not explicitly listed in Sections A and B of the Annex to CSDR, requiring CSDs to comply with most provisions of MiFID. This reference to MiFID will be updated to refer to MiFID 2 and the markets in financial instruments regulation (606/2014) when these measures take effect.

Question 10

Do you agree with the proposed amendments suggested in the RRRs?

Amending existing requirements: the Uncertificated Securities Regulations 2001

Currently in the UK a CSD must be authorised as an Operator under the Uncertificated Securities Regulations 2001 (USRs) in order to be permitted to record securities without paper certificates, a key activity of any CSD. To ensure compliance with CSDR’s provision surrounding authorisation, amendments to the USRs are required. These are set out in Annex B of this document.

The approach that the government has decided to take is to automatically permit CSDs authorised under CSDR to become Operators. It was considered that in practice any Operator of a relevant system under the USRs would be a CSD as defined under CSDR, and that it would not be necessary to cater for the possibility of entities which were not CSDs seeking to become Operators. In consequence the Regulations remove the Operator authorisation requirements (see in particular amendments to regulations 4 to 7 and Schedules 1 and 3).

Through the proposed amendments to regulation 3 the definition of an Operator will include: authorised CSDs in the UK (by virtue of them being RCSDs); CSDR authorised CSDs in the EEA; and, third country CSDs recognised by ESMA. This change is needed because Articles 23 and 25 of CSDR permits EEA and third country CSDs to passport their services to the UK.

In line with this approach, further amendments are proposed that remove the provisions related to the approval of any application to become an Operator under regulation 5. This includes removing the power that permits the Bank of England to require the payment of fees under regulation 6 as a condition of authorisation. Fees can still be charged under FSMA in relation to recognition as a RCSD. Regulation 5(4) and corresponding provisions in Schedule 3 are revoked as they concern the refusal of approval and overlap with Article 20 of CSDR. Regulation 7, regarding withdrawal of approval, is also revoked as this is now superseded by CSDR Article 20. Other provisions that have been revoked include regulation 12, as other enforcement powers to address breaches of CSDR leave this provision unnecessary, and regulation 13 and Schedule 2 (prevention of excessive regulatory provision) which are not compatible with CSDR.

Regulations 8 to 11A of the USRs, which provide the Bank of England with powers to obtain information from Operators and secure Operators’ compliance with the USRs, are retained. These powers will apply in relation to the new categories of Operators: EEA and third country CSDs.

Regulation 5 is replaced with a provision retaining Schedule 1 to keep in place the operating conditions of ‘relevant systems’. In Schedule 1, any provisions considered to duplicate CSDR or to fall within its ambit are proposed to be deleted. The government considers that the provisions proposed to be retained relate to securities law and other matters beyond the scope of CSDR. These provisions can therefore apply to EEA CSDs and third country CSDs wishing to passport their services into the UK, and the government’s view is that they should. Nevertheless aspects of Schedule 1 of the USRs will need amending further – a topic addressed later on in this chapter - see this paragraph.

Further to these amendments, transitional provisions will be required with regards to the treatment of existing Operators, which have been set out in regulation 8 in Annex B. The proposed transitional provisions implement Article 69(4) of CSDR under which national rules on authorisation of CSDs continue to apply until the date of the decision under CSDR about authorisation.

Regulation 8(1) and (2) in Annex B defines the “transition period” for an Operator under the USRs. The transition period starts when the USRs amendments come into force, which will not be before the entry into force of the RTS referred to in Article 69(2) of CSDR. Entry into force of the RTS referred to in Article 69(2) marks the start of the 6 month period allowed for existing CSDs to apply for authorisation under CSDR. The transition period ends when an Operator’s application for authorisation under CSDR is decided or if the Operator has not made an application for authorisation under CSDR, when the 6 month period expires.

Regulation 8(3) in Annex B disapplies the amendments to the USRs during the transition period for a CSD. Regulation 8(4) provides that during the transition period an Operator’s approval as such under the USRs remains in place unless withdrawn. During the transition period the USRs provisions about withdrawal of approval will still apply by virtue of regulation 8(3).

Under regulation 8(5) in Annex B, once a USRs Operator’s application for CSD status under CSDR has been decided, that Operator’s approval under the USRs ceases to be valid. However, under the USRs as proposed to be amended, an Operator will no longer require approval under the USRs; it will instead need to be authorised under CSDR.

 Question 11

Do you believe the proposed changes to the USRs on removing the Operator approval regime is appropriate and consistent with CSDR?

 Question 12

Do you believe the proposed transitional arrangements are adequate and in keeping with the requirements of CSDR?

Banking-type ancillary services

A CSD may wish to seek authorisation to provide banking-type ancillary services in its CSDR authorisation application. The Bank of England was designated as the competent authority for this in regulation 2(2)(c) of the 2014 Regulations, both where the banking-type ancillary services are provided by the CSD and where they are provided by a designated separate legal entity. The Prudential Regulation Authority (PRA) will receive all information included in the complete application for such an authorisation, as is required under Article 55(4)(b) of CSDR. Any CSD that is successful in its application under Article 54(2)(a) of CSDR must be authorised as a credit institution and obtain the requisite permission under Part 4A of FSMA; it is the PRA which is responsible for such authorisation of CSDs, under regulation 2(4)(a) of the 2014 Regulations. The exemption from FSMA under section 285 will not apply to banking-type ancillary services.

It is the government’s view that little supplemental legislation is needed with regards to this process. CSDR is directly applicable and no incompatible domestic legislation has been identified in this respect. Banking type ancillary services which the CSD is authorised to provide will be recorded by the FCA and this information is published on the FCA register of authorised persons. However see proposed regulation 5J(1)(i) to (k) in Annex A described here relating to the new right of appeal to the Upper Tribunal for disappointed applicants, implementing Article 66 of CSDR.

Question 13

Do you agree with the approach to supplemental legislation with regards to the authorisation of banking-type ancillary services? If not, please provide your reasons for this that would help us to understand your view.

2.4 Section 4: Enforcement powers and additional provisions

Enforcement powers

In order to ensure compliance with the requirements set out in CSDR, the government proposes to extend the scope of existing powers applying to RCHs, relating to enforcement and information gathering, to RCSDs. The proposed approach is to replicate the powers already available to competent authorities for RCHs, and also to provide in addition the powers necessary in enforcing the requirements of CSDR itself. The proposed amendments can be found in Annex A, specifically Parts 2 and 5.

Minor amendments are proposed to section 293 of FSMA to clarify “guidance” references. Section 293 as amended does not include any amendment to extend the Bank of England’s rule making power to EEA CSDs. However, there may be value in permitting the Bank of England to do this, as EEA CSDs are not recognised bodies and so fall outside the scope of the power as it stands. It might be argued that this power would assist the Bank of England to fulfil functions under Article 24 of CSDR. The government welcomes the views of respondents on this matter.

As mentioned previously, EEA CSDs are entitled to provide CSD services in the UK. As such, Article 24(2) of CSDR permits competent authorities of the host Member State to require CSDs to report to them periodically on their activities in that host Member State. In light of this, section 293A of FSMA is proposed to be extended to allow the Bank of England to require such information from EEA CSDs passporting their services into the UK. Respondents views are sought on whether section 293A(2) should be limited to EEA CSDs with branches in the UK (it is not at present) and whether limitations on the power need to be included, for example should the information be reasonably required in connection with the Bank of England’s functions under CSDR?

 Question 15

Do you believe that section 293 of FSMA should be amended to extend the scope beyond recognised bodies to include EEA CSDs?

 Question 16

Should section 293A of FSMA be limited to EEA CSDs with branches in the UK? Are other restrictions on the power appropriate?

The new section 295A of FSMA gives the Bank of England powers permitting on-site inspections of branches of passporting EEA CSDs operating in the UK in order to implement Article 24(1) of CSDR. This power makes clear that an on-site inspection can only take place once reasonable notice has been provided and the home competent authority of the EEA CSD has been informed. Section 295A is not intended to provide for entry to premises using force. If entry is refused the Bank of England has the option to apply to the court for an injunction or in Scotland for an order of specific performance under section 295A(3).

Section 296 of FSMA provides regulators with the power to give directions in specified cases. This will apply to RCSDs, for which the Bank of England will be the “appropriate regulator” by virtue of an amendment to section 285A of FSMA.

An amendment is proposed to enable the Bank of England to give a section 296 direction to a RCSD to enforce a decision under Article 33(3), 49(4), 52(2) or 53(3) of CSDR. The power of direction in these cases would enable the Bank of England to direct a CSD that fails to comply with a decision following a complaint made against the CSD relating to access requests, issuance requests, CSD links, and access between a CSD and another market infrastructure.

The new section 296(1B) of FSMA enables the Bank of England to give a direction to EEA CSDs that offer services in the UK. The power is available only where the EEA CSD has failed to comply with CSDR following action set out in Article 24(5) of CSDR, that is where the CSD persists in infringing CSDR. Section 296(2B) includes the power for the Bank of England under section 296 to direct providing access to any premises of the EEA CSDs in the UK. This is for the purposes of inspecting the premises and inspecting any documents on the premises which appear relevant. The direction could also require suspension of a regulated activity.

With regards to any third country CSD recognised by ESMA, the third country CSD is not directly subject to CSDR, but instead to third country rules (that need to be equivalent to CSDR). ESMA is primarily responsible with dealing with the situation when the third country CSD does not comply with the conditions for recognition. The powers of Member States’ authorities are enshrined in Article 25(4)(d),(5), (7) and (10) of CSDR and they need to be exercised in close cooperation with ESMA. Given this the government has made no provision for the Bank of England’s powers to be extended in respect of third country CSDs, however, we welcome views on this matter from respondents.

 Question 17

Do you agree the proposed changes in section 295A and section 296 are appropriate for the purposes of CSDR?

 Question 18

In the context of Article 25 of CSDR, is it appropriate to give the Bank of England any information-gathering or enforcement powers in respect of third country CSDs providing services in the UK, and if so, which powers and in what circumstances?

Sanctions

Title V of CSDR sets out its requirements for sanctions and the government needs to ensure these are available to the relevant competent authorities in the UK. Several amendments have been proposed to this effect.

Firstly, an amendment to section 312E (‘public censure’) extends this provision to RCSDs to ensure this section continues to apply – as it currently is available with respect to RCHs. This will enable the Bank of England to publish statements where it considers a CSD to have contravened a relevant requirement. ‘Relevant requirements’ include contraventions of Part 18 of FSMA and of CSDR. Section 312F (the power to impose financial penalties) will apply with respect to RCSDs as they are ‘recognised bodies’.

Secondly section 312FA is a new power to impose penalties on individuals where a CSD has contravened a relevant requirement. The penalties available to the Bank of England are to publish statements, impose penalties, and prohibit a person from holding an office or position involving responsibility for taking decisions regarding the management of a CSD. A prohibition can only be imposed where the individual was responsible for the contravention, but other penalties are available where the contravention occurred with the consent or connivance, or was attributable to neglect on the part, of the individual. Power is also provided for the Bank of England to revoke such a prohibition. This proposed amendment implements Article 61(2) of CSDR (‘administrative sanctions and measures: management bodies’) and Article 63(2)(d) (‘sanctions for infringements’).

The Regulations make consequential amendments to the remainder of Chapter 3B of Part 18 of FSMA. In particular, statements of policy are extended to cover penalties applied to individuals and prohibitions on individuals from holding office. Chapter 3B does not apply in relation to EEA CSDs.

Schedule 17A to FSMA (which applies a number of FSMA provisions when the Bank of England is acting as a regulator under Part 18 of FSMA) is proposed to be amended such that the current powers afforded to the Bank of England for RCHs will be extended to RCSDs. Provisions of Schedule 17A proposed to be extended to RCSDs, or which will extend to RCSDs without specific amendment, include:

• Paragraph 10 (concerning regulators’ rules);
• Paragraph 11 which applies section 165 of FSMA (power to require information);
• Paragraph 12 which applies section 166 of FSMA (reports by skilled person);
• Paragraphs 13 to 16 which apply (in some cases indirectly) other provisions of Part 11 of FSMA relating to general and specific investigations, entry to premises under warrant and criminal offences;
• Paragraph 17 which applies Part 12A of FSMA powers in relation to UK parent undertakings;
• Paragraphs 22 and 23 which apply section 347 of FSMA (records of authorised persons and recognised bodies) and sections 348 to 350 and 353 of FSMA (disclosure of information);
• Paragraphs 26 to 28 which apply powers under Part 25 of FSMA giving the Bank of England power to apply for an injunction and restitution, and a further modification secures that prohibitions under new section 312FA(2) of FMSA on individuals from holding office can be enforced by injunction; and,
• Paragraph 36 which gives the Bank of England the power to charge fees to certain recognised bodies (see in more detail below).

A number of FSMA powers of the Bank of England listed in Schedule 17A are also extended to EEA CSDs, but only in the circumstances in the second sub-paragraph of Article 24(5) of CSDR. An example is paragraph 26 of Schedule 17A to FSMA (power to apply for an injunction) which could be invoked in respect of a likely or actual contravention by the EEA CSD of the requirements of CSDR. The government is considering whether for CSDR enforcement purposes the Bank of England should also be given powers in support of its functions under Article 24(4) of CSDR, and if so what powers, and whether the Bank of England needs powers of investigation in relation to EEA CSDs, in particular to enable it to form a view about whether an EEA CSD is in breach of CSDR as referred to in the first sub-paragraph of Art 24(5) of CSDR.

Paragraph 36 of Schedule 17A is proposed to be extended to RCSDs, EEA CSDs and third country CSDs in addition to settlement internalisers which are mentioned earlier in the document. This is the Bank of England’s power to charge fees in connection with the discharge of functions under or as a result of Part 18 of FSMA, CSDR and Part 7 of the Companies Act 1989. Under the current draft the Bank of England does not have functions under FSMA in relation to third country CSDs but it has limited functions in relation to third country CSDs under Article 25 of CSDR.

Question 19

Do you consider that the tests for individual liability under section 312FA(1) and (2) are appropriate?

Question 20

Should the Bank of England be given additional powers of investigation and enforcement in relation to EEA CSDs in support of its function under Article 24(4) and the first sub-paragraph of Article 24(5) of CSDR, and if so what powers? In particular, should the penalties in sections 312E, 312F or 312FA be available in relation to EEA CSDs, and if so, in what circumstances?

Question 21

Do you believe that the sanctions for non-compliance with CSDR provided in this section are sufficient, together with sanctions under FSMA, particularly in view of the omission of the sanction of removal of USRs Operator status under the SI at Annex B?

 Additional provisions

Part 5 of the SI at Annex A sets out additional amendments to the 2014 Regulations which the government considers are necessary to ensure the required powers are afforded to the relevant competent authorities to fulfil their obligations to enforce CSDR. These can be seen in the additional regulations 5D to 5L and are visited in turn. The first set of new regulations, 5D to 5I, concern a change of control at the CSD. Regulation 5K is about enforcement of access to trading venues, and regulation 5L the reporting of infringements. Regulation 5J addresses Article 66 of CSDR (‘right of appeal’).

 Change of control

The new regulations 5D to 5I implement CSDR Articles 27(7) and 27(8) concerning changes in the control of a CSD. ‘Control’ is defined in Article 2(1)(21) of CSDR and the UK legislation transposing the EU provisions referred to in CSDR is set out in the definition in regulation 5D.

Regulation 5E provides the Bank of England with the power to require a person giving notice of a proposal to acquire control of a CSD to produce information or documents. The Bank of England will have a set period of time to make such requests. The government seeks the views of respondents as to the appropriate timeframe, provisionally suggested as 14 working days. The information or documents must be reasonably required in order to decide whether there are objective and demonstrable grounds for believing that a proposed acquisition would pose a threat to the sound and prudent management of the CSD, or to the ability of the CSD to comply with CSDR. It should also be noted that regulation 5E starts the Article 27(8) timeframe of 60 working days for the Bank of England to make a decision on the proposed changes of control after all the required information has been received.

Regulation 5F sets out the procedure that will be followed in relation to the Bank of England’s decision regarding a proposed acquisition of a CSD. It is intended to secure compliance with Article 66 of CSDR. The Bank of England must give reasons for its decision. Where the Bank of England opposes the proposed acquisition, the person giving notice may refer the decision to the Upper Tribunal. The person giving notice may also make representations to the Bank of England within a set period of time. Following any representations made by the person giving notice, the Bank of England must provide written notice of its decision whether to rescind its decision under Article 27(8) or not. The views of respondents are sought on the question of whether the CSD (in addition to the person giving notice) should have a right of redress if the Bank of England opposes the change of control.

Regulation 5G provides the Bank of England with the power to give a restriction notice to a person who has acquired a controlling interest in a CSD: (i) without giving notice to the Bank of England as required by Article 27 of CSDR; (ii) prior to a Bank of England decision on the matter; or (iii) in contravention of the Bank of England’s decision under Article 27(8) of CSDR. The restriction notice may direct shares (or voting power) to be subject to one or more restrictions. These restrictions may be to (a) void the transfer of shares or voting power; (b) to prevent voting rights from being exercised; (c) to prevent the issue of further shares; and (d) to prevent payments being made in respect of the relevant shares, except in liquidation. The person that receives such a restriction notice may refer the matter to the Upper Tribunal. This approach mirrors that seen in previous legislation relating to financial market infrastructure, for example EMIR (see Part 6 of the Financial Services and Markets Act 2000 (Over the Counter Derivatives, Central Counterparties and Trade Repositories) Regulations 2013).

Regulation 5H provides the Bank of England with the power to seek an order from the High Court or Court of Session for the sale of shares, in the same circumstances that it may issue restriction notices under regulation 5G. This once again mirrors the approach taken under EMIR.

Regulation 5I of the 2014 Regulations creates criminal offences relating to acquisitions of control. These are: failure to comply with an obligation to notify the Bank of England under Article 27(7) of CSDR; giving an Article 27 notice but making the acquisition prior to the expiry date of the assessment period, unless the Bank of England has approved the acquisition; making an acquisition in contravention of the Bank of England’s decision under Article 27(8) of CSDR; and, providing false information to the Bank of England. The offence of making an acquisition in contravention of the Bank of England’s decision under Article 27(8) of CSDR carries a maximum penalty on summary conviction of a fine, or upon conviction on indictment, to imprisonment for a maximum sentence of two years or a fine, or both. The maximum penalty for the other offences, which are all ‘either way’ offences, is a fine. Again this is a similar approach to that taken under EMIR.

 Question 22

In regulation 5E, what timeframe would you deem appropriate to permit the Bank of England to require additional information or documentation relevant to the decision around any proposed change of control of a CSD? Do you consider that it is appropriate and proportionate to provide that the 60 day time limit for decisions on a change of control runs from receipt of the information requested? If not, can you suggest alternative approaches to enable the Bank of England to obtain the information necessary to assess an application of approval of a change of control?

Question 23

Regarding regulation 5F, should the CSD (in addition to the person giving notice) have a right of redress if the Bank of England opposes the change of control?

 Access to trading venues

Regulation 5K of the 2014 Regulations (access between CSDs and other market infrastructure) is proposed so that the FCA has the power to direct trading venues that are not recognised bodies, which in practice means OTFs and some MTFs, to provide access to CSDs under Article 53(3) of CSDR. The FCA is the designated competent authority in relation to trading venues. Regulation 5K applies the procedure in section 298 of FSMA to directions, and ultimately the FCA has the ability to enforce the direction by applying for an injunction or in Scotland for an order for specific performance.

 Reporting of infringements

Regulation 5L (‘reporting of infringements’), requires trading venues, investment firms, CCPs, settlement internalisers, and credit institutions designated under Article 54(3)(b) of CSDR, to have in place appropriate procedures for their employees to report actual or potential infringements of CSDR (and any directly applicable EU regulation made under it). This implements Article 65(3) of CSDR. This provision is subject to the protections under that article, including the protections surrounding the identity of the person reporting the alleged infringements and the person who is allegedly responsible. This parallels the obligation for CSDs set out in paragraph 40 of the Schedule to the RRRs which is mentioned earlier in this document. The views of respondents are sought on how this provision, which is not a direct CSDR requirement, should be enforced. For example, might regulation 5L be enforced through extending regulations 5A to 5C?

Article 65 of CSDR is also implemented in part by the amendment to the Public Interest Disclosure (Prescribed Persons) Order 2014 located in Part 2 of the Schedule to the SI at Annex A. The Order extends protections for workers under Part 4A of the Employment Rights Act 1996 if they make protected disclosures accordance with the Act to (among others) the Bank of England. The Order reference to the Bank of England is updated to reflect their functions under CSDR.

 Question 24

What would be the most practical and appropriate means of enforcing regulation 5L?

Right of appeal

Regulation 5J of the 2014 Regulations is proposed so as to ensure compliance with CSDR’s Article 66 (‘right of appeal’). Regulation 5J (‘references to the Tribunal’) sets out the decisions made by the Bank of England or FCA under CSDR which may be referred to the Upper Tribunal. Some of these have been mentioned specifically elsewhere in this document. Part 9 of FSMA regarding hearings and appeals is applied.

Some of the decisions referred to in regulation 5J may be referred to ESMA, see for example a decision under Article 52 of CSDR where a request for access to another CSD has been refused, and the competent authorities of the two CSDs concerned disagree. The government takes the view that the right to refer the matter to the Upper Tribunal should arise only following a final decision of the competent authority which would follow any referral to ESMA. Respondents are asked to consider whether regulation 5J needs to spell this out.

CSDR is directly applicable (as an EU regulation), and in most cases the government has taken the view that the Article 66 requirement for decisions and measures to be properly reasoned does not require implementing legislation. However, where domestic legislation sets out a decision process, the requirement to give reasons is included. For example, see the proposed amendment of section 298(6) of FSMA (directions).

Question 25

Do you agree that the Article 66 of CSDR requirement that decisions and measures must be properly reasoned generally does not require implementing?

Question 26

Does regulation 5J need to make it clearer that a right to refer to the Upper Tribunal arises after any reference to ESMA under CSDR has been determined?

Amendments to the Companies Act 1989

Further to the above amendments additional provisions are proposed relating to the Companies Act 1989. These can be found in Annex A, specifically Part 3 ‘Amendments to the Companies Act 1989 and related secondary legislation’.

The government has taken the view that it is necessary to amend legislation setting out the definition of a market contract in relation to recognised bodies, specifically RCSDs. This is due to the proposed changes related to the creation of a RCSD status and the need to clarify the definitions of the authorised services that can be provided by a CSD under CSDR.

The proposed amendments to section 155 (‘market contracts’) of the Companies Act 1989 provides clarity to this effect. Section 155 (3ZA) extends section 155 to apply to contracts entered into by a CSD with either its members or other recognised bodies, for the purposes of providing authorised CSD services. The proposed section 155 (3D) sets out what authorised CSD services are. The amendment links in the different services that can be authorised under CSDR, and references the Annex to CSDR directly, to ensure clarity. It is worth noting that the definition of authorised CSD services includes those listed in Sections A, B and C of the Annex to CSDR. This therefore includes non-banking and banking-type ancillary services.

Question 27:

Is the proposed approach to defining authorised CSD services appropriate in including both non-banking and banking type ancillary services?

Further proposed amendments include the creation of a new section 170C (‘EEA CSDs and third country CSDs’). This amendment extends the proposed section 155(3D) definition of authorised CSD to EEA and third country CSDs; whilst also disapplying certain requirements on such CSDs including the need to report on completion of default proceedings (unless notified by the Bank of England that a report is necessary), and requirements set out in section 157 of the Companies Act 1989 related to changes in default rules. The provision also clarifies the definition of a ‘UK member’ of an EEA or third country CSD (that is where the law of a part of the UK will apply for the purposes of an insolvent reorganisation or winding up).

The final amendment within the Companies Act 1989, that the government wishes to draw to the attention of respondents, is the creation of the new section 182B (‘recognised CSDs: disapplication of provisions on mutual credit and set-off’). The proposed provision protects securities and assets recorded at a CSD for the purpose of an insolvency event in accordance with Article 38 of CSDR (‘protection of securities of participants and those of their clients’). This is required to sufficiently protect the securities held within an account that is held on behalf of any other members, or their clients, from being used to set off liabilities following the insolvency of a CSD participant.

Question 28:

Is the proposed approach to amending section 182 of the Companies Act 1989 adequate in ensuring compliance with Article 38 of CSDR?

Beyond the proposed amendments, further issues of policy related to the current protections afforded to RCHs should be set out. Currently RCHs benefit from protections related to the margin and default fund contributions that are posted at an RCH. These are typically seen in CCPs, however, CSDs (at present) do not require margin and do not have a default fund to which participants could contribute to.

The government is not aware of any intention for either of these to be implemented, but this does not mean that the option should be restricted by the protections offered in law for RCSDs. It is therefore necessary to seek the opinion of respondents as to whether margin and default fund contributions held at RCSDs should be afforded the same protections as RCHs. Is the lack of a requirement of margin and default fund contributions at a RCSD a distinction between CCPs and CSDs that should be reflected in law?

Question 29:

Regarding the treatment of margin and default fund contributions in the Companies Act 1989, should the protections afforded to RCHs apply to RCSDs? Please provide reasons for your answer.

2.5 Section 5: Freedom to issue in an authorised CSD and other relevant provisions

Applying the freedom to issue

CSDR Article 49(1) provides the right for issuers to arrange for their securities to be recorded in any authorised CSD, established in any Member State, provided that the securities are admitted to trading on regulated markets or MTFs or traded on trading venues. To offer this service to issuers in another Member State, the CSD must comply with the Article 23 of CSDR conditions (freedom to provide services in another Member State). The second sub-paragraph of Article 49(1) provides: “without prejudice to the issuer’s right to issue in any EU CSD, the corporate or similar law of the Member State under which the securities are constituted shall continue to apply”. Domestic legislation needs to be amended to avoid conflict with Article 49 of CSDR, including amendments that address the treatment of securities to be recorded in the UK’s only CSD. The proposed amendments can be found in Annex B ‘Amendments to the Uncertificated Securities Regulations 2001’.

There are two key changes to implement Article 49(1) of CSDR: new regulation 2A of the USRs and amendments to regulations 14 and 19 of the USRs (see below). Respondents’ attention is also drawn to the revised definition of “Operator” in regulation 3 of the USRs - referred to in this paragraph - and the amendment to the definition of “securities” also in regulation 3 which aims to exclude EEA securities from the definition.

The new regulation 2A(1) adjusts the scope of the USRs. With the exception of regulation 2A(2) and (3)), the USRs will continue to apply only to securities governed by UK law. However, a relevant system will be able to be operated by an Operator established in the UK, in another EEA State or in a third country. The revised definition of Operator includes a RCSD (a CSD authorised under CSDR Article 16); an EEA CSD authorised under Article 16 of CSDR and which has complied with Article 23 of CSDR; or, a third country CSD recognised by ESMA under Article 25 of CSDR. The draft refers to the new definitions in section 285 of FSMA - see this paragraph. For EEA CSDs note section 285(3F) of FSMA which is intended to secure that an EEA CSD not complying with Article 23 is not able to benefit from the FSMA exemption. Regulation 2A(1) should be read against the background of section 770 of the Companies Act 2006: a transfer to a CSD not established in the UK would be under the USRs and should therefore comply with section 770.

The new regulation 2A(2) and (3) enables title to EEA shares and securities (which are ones governed by the law of another EEA State) to be evidenced in, and transferred by means of, a relevant system operated by an Operator. This provision is needed because the USRs as they stand are designed for UK shares and securities, see in particular the definition of “share” in Article 3 and regulation 19(2). New regulation 2A(4) provides that the EEA shares or securities continue to be governed by the corporate or similar law of the EEA state concerned (under Article 49(1) of CSDR), and consequently the remainder of the USRs are disapplied.

Regulation 14 of the USRs is proposed to be amended to secure that where shares governed by UK law fall within the scope of Article 49(1) of CSDR, the USRs requirements are subordinate to the requirements of CSDR. Title to shares in a company within the scope of Article 49(1) may be transferred by means of a relevant system where the Operator approves the company’s application under Article 49(1) of CSDR – subject to requirements set out in new regulation 14(2)(a), (b) and (c). Regulation 14 in its current form continues to apply as regards shares which are outside the scope of Article 49(1) of CSDR. Similar amendments are made to regulation 19 which applies in respect of securities other than shares. The government takes the view that the retained provisions such as regulations 15 and 16 are outside the scope of CSDR itself and are elements of UK corporate law.

Additionally the current proposed amendments extend the right to issue into third country CSDs recognised by ESMA. Whilst CSDR Article 49(1) states that this right applies to any CSD established in any Member State, the government has taken the view that third country entities should also be able to be USRs Operators, or else third country entities would not fully benefit from the passporting provisions in Article 25 of CSDR. We welcome respondents’ views on this proposed approach.

Provision is not made within these Regulations with regards to enforcement of the rights of issuers under Article 49(1) of CSDR. The government has taken the view that enforcement powers provided for under the proposed amendments to FSMA are adequate in ensuring a breach of CSDR is properly dealt with. In addition, see new regulation 5J(1)(f) of the 2014 Regulations (in Annex A) to secure a right of appeal to the Upper Tribunal where there has been a complaint under Article 49(4) of CSDR.

Question 30:

Do you agree with the proposed approach of implementing Article 49(1) of CSDR? Are proposed new regulation 2A and the proposed amendments to regulations 14 and 19 suitable for this purpose?

Question 31:

Do you agree with the government’s view that the requirements which have been retained in regulations 14, 15, 16, and 19 are outside the scope of CSDR?

Question 32:

Do you agree with the government’s approach to include third country CSDs within the definition of “Operator” and in particular to treat third country CSDs in the same way as EEA CSDs under the proposed new regulation 2A?

Question 33:

Do you agree with the government’s approach to enforcement of Article 49 of CSDR?

2.6 Transitional provisions: issuers of securities already evidenced in a UK CSD

Article 49 of CSDR does not deal explicitly with the question of whether issuers of securities can continue to use their current CSD facility without making a request under Article 49. The government considers that CSDR did not envisage that new requests should be made in respect of securities already recorded in a CSD. It is considered that Article 49 should be construed as applying to new issues of securities or where an issuer moves its business to a different CSD. The government therefore proposes to make transitional provision, as per Annex B ‘Transitional and savings provisions for issuers’ regulation 9.

Regulation 9 makes transitional provision for securities (including shares) recorded in an Operator before the Operator is authorised or recognised as a CSD under CSDR. It clarifies that an issuer of securities which are already recorded in a CSD does not need to make a request under Article 49 of CSDR. It ensures that the issuer, despite not having made a request under Article 49, continues to be permitted to have its securities evidenced otherwise than by a certificate.

Question 34: Do you agree with the proposed approach of not requiring Article 49(2) requests from issuers who currently have securities and shares recorded in the UK’s CSD?

2.7 Other relevant provisions: amendments to the USRs ‘Schedule 1’

As previously raised in section 3 - see paragraph - amendments are proposed in Annex B under ‘Operating conditions for relevant system’, whereby regulation 5 of the USRs is reframed. Regulation 5 of and Schedule 1 to the USRs keep in place the operating conditions of ‘relevant systems’ but Schedule 1 will no longer contain authorisation requirements for Operators. In Schedule 1, any provisions considered to duplicate CSDR or to fall within its ambit are proposed to be deleted. These are visited in turn below. The retained provisions of Schedule 1 are considered to fall within the ambit of UK corporate law, and as such are outside the scope of CSDR.

The paragraphs listed below do not appear to the government to relate to corporate law, and appear to overlap with requirements within CSDR itself or else to fall within the scope of CSDR.

• Paragraph 1(arrangements and resources) may be inconsistent with CSDR’s Articles 33(outsourcing), 33(4) (requirements for participation), 41 (participant default rules and procedures), 43(2) (legal risks) and 47 (capital requirements);
• Paragraph 2 (financial resources) may be inconsistent with CSDR Article 47 (capital requirements);
• Paragraph 3 (promotion and maintenance standards) appears to concern governance rather than corporate law. It is in similar territory to CSDR’s Articles 26 (general provisions relevant to organisational requirements), 27 (senior management, management body and shareholders), 28 (user committee), 29 (record keeping) and 36 (general provisions relevant to requirements for CSD services);
• Paragraph 4 (operation of the relevant system) is inconsistent with CSDR’s Articles 30 (outsourcing) and 48 (CSD links);
• Paragraph 5 (system security) is to be amended to delete governance-type requirements, in particular sub-paragraph (2) due to its overlap with CSDR Articles 36 (general provisions relevant to requirements for CSD services), 42 (general provisions relevant to prudential requirements) and 45 (operational risks). Sub-paragraphs (3)(a)(ii) and (b)(ii) are also omitted, as they concern governance and not corporate law. It is for consideration whether further provisions of paragraph 5 should be removed;
• Paragraph 6 (system capabilities) overlaps with CSDR’s Articles 36 (general provisions relevant to requirements for CSD services), 42 (general provisions relevant to prudential requirements), and 45 (operational risks);
• Paragraph 7 overlaps with CSDR’s Article 37 (integrity of the issue);
• Paragraph 8 is not consistent with proposed RTS under CSDR’s Article 37(4) (integrity of the issue), and possibly Article 6 (measures to prevent settlement fails);
• Paragraph 10 duplicates CSDR Article 29 (record keeping);
• Paragraph 11 supplements provisions also proposed to be omitted (paragraphs 7, 8 and 10);
• Paragraph 23 overlaps with CSDR’s Article 29 (record keeping), and 37(4) (integrity of the issue);
• Paragraph 24 also overlaps with proposed RTS under CSDR;
• Paragraph 25(a) appears inconsistent with CSDR’s Articles 6 (measures to prevent settlement fails), and 37 (integrity of the issue);
• Paragraph 25(d) appears inconsistent with CSDR’s Articles 6 (measure to prevent settlement fails), 7(9) (measures to address settlement fails), 33(4) (requirements for participation), and 41 (participant default rules and procedures);
• Paragraph 27 overlaps with CSDR’s Article 29 (record keeping); and,
• Paragraph 28 (which transposes Article 34 of MiFID) is no longer needed because it is only relevant for UK CSDs, and paragraph 39 of the Schedule to the RRRs makes equivalent provision for UK CSDs.

The government considers that the remaining provisions proposed to be retained relate to corporate law and other matters beyond the scope of CSDR. Provisions of corporate law are to be retained. They can, and the government’s view is that they should, therefore apply to EEA CSDs and third country CSDs wishing to passport their services into the UK. There are, however, a number of provisions in Schedule 1 which are difficult to categorise. For example, it might be considered that the remainder of paragraph 5(3) and paragraph 13 of Schedule 1 are more properly regarded as within scope of CSDR. Respondents’ views are invited on whether any further provisions in Schedule 1 should be removed because they are incompatible with CSDR.

Question 35:

Do you believe the proposed revision of regulation 5 is appropriate and consistent with CSDR?

Question 36:

Do you consider that the proposed omissions in Schedule 1 are appropriate, and are there other provisions in Schedule 1 to the USRs that you believe should be omitted due to inconsistencies or overlapping with CSDR’s requirements?

Consultation questions

Below is a list of all the consultation questions raised in Chapter 2. These are listed, along with a reference to the section in which they are featured, in the order in which they appear.

Question 1: (Section 1: Competent authorities) Do you agree with the designations set out above? If not, please provide your reasons for this to help us understand your view.

Question 2: (Section 2: Settlement internalisers) Do you agree with the provision of powers to the Bank of England in support of its function under Article 9 of CSDR with respect to reporting by settlement internalisers, as drafted in Annex A? If not, please provide your reasons for this to help us understand your view.

Question 3: (Section 2: Settlement internalisers) Should paragraph 36(2) of Schedule 17A to FSMA be amended to permit the Bank of England to recover costs of setting up the necessary systems for reporting by settlement internalisers?

Question 4: (Section 2: Settlement internalisers) Do you believe that the Bank of England should be given powers equivalent to sections 166 and 166A of FSMA in its role as the competent authority for settlement internalisers?

Question 5: (Section 3: Recognised CSDs and authorisation) Do you agree with the proposed approach of creating a new recognised body category – a recognised central securities depository?

Question 6: (Section 3: Recognised CSDs and authorisation)
Do you believe the proposed scope of the exemption in section 285(3D) and the recognition order in section 290(1E) for RCSDs to be suitable? Specifically, should the recognition order record any authorisation under Article 54(2)(a) or (b) of CSDR, and list the ancillary banking services to which its authorisation relates, even though the CSD does not benefit from the FSMA exemption in section 285 for banking services? Do you consider that having outsourced activities and CSD links listed in the recognition order, but not explicitly mentioned in the section 285 exemption, would cause confusion?

Question 7: (Section 3: Recognised CSDs and authorisation) Is the scope of the exemptions for EEA and third country CSDs appropriate?

Question 8: (Section 3: Recognised CSDs and authorisation) Where the second sub-paragraph of Article 24(5) of CSDR applies in relation to an EEA CSD, should the Bank of England be obliged under section 298 of FSMA to allow a period for representations before giving a direction to the EEA CSD? Should the period for representations be retained in circumstances where EEA CSDs have persistently breached CSDR, as discussed in paragraph 2.3.14?

Question 9: (Section 3: Recognised CSDs and authorisation) Do you agree that section 291 of FSMA need not be amended?

Question 10: (Section 3: Recognised CSDs and authorisation) Do you agree with the proposed amendments suggested in the RRRs?

Question 11: (Section 3: Recognised CSDs and authorisation)
Do you believe the proposed changes to the USRs on removing the Operator approval regime is appropriate and consistent with CSDR?

Question 12: (Section 3: Recognised CSDs and authorisation) Do you believe the proposed transitional arrangements are adequate and in keeping with the requirements of CSDR?

Question 13: (Section 3: Recognised CSDs and authorisation)
Do you agree with the approach to supplemental legislation with regards to the authorisation of banking-type ancillary services? If not, please provide your reasons for this that would help us to understand your view.

Question 14: (Section 3: Recognised CSDs and authorisation)
Do you agree with the proposed transitional provisions? Should any further modifications be made to legislation applying to applicants for authorisation under CSDR during the transition period?

Question 15: (Section 4: Enforcement powers and additional provisions)
Do you believe that section 293 of FSMA should be amended to extend the scope beyond recognised bodies to include EEA CSDs?

Question 16: (Section 4: Enforcement powers and additional provisions)
Should section 293A of FSMA be limited to EEA CSDs with branches in the UK? Are other restrictions on the power appropriate?

Question 17: (Section 4: Enforcement powers and additional provisions)
Do you agree the proposed changes in section 295A and section 296 are appropriate for the purposes of CSDR?

Question 18: (Section 4: Enforcement powers and additional provisions)
In the context of Article 25 of CSDR, is it appropriate to give the Bank of England any information-gathering or enforcement powers in respect of third country CSDs providing services in the UK, and if so, which powers and in what circumstances?

Question 19: (Section 4: Enforcement powers and additional provisions)
Do you consider that the tests for individual liability under section 312FA(1) and (2) are appropriate?

Question 20: (Section 4: Enforcement powers and additional provisions)
Should the Bank of England be given additional powers of investigation and enforcement in relation to EEA CSDs in support of its function under Article 24(4) and the first sub-paragraph of Article 24(5) of CSDR, and if so what powers? In particular, should the penalties in sections 312E, 312F or 312FA be available in relation to EEA CSDs, and if so, in what circumstances?

Question 21: (Section 4: Enforcement powers and additional provisions)
Do you believe that the sanctions for non-compliance with CSDR provided in this section are sufficient, together with sanctions under FSMA, particularly in view of the omission of the sanction of removal of USRs Operator status under the SI at Annex B?

Question 22: (Section 4: Enforcement powers and additional provisions)
In regulation 5E, what timeframe would you deem appropriate to permit the Bank of England to require additional information or documentation relevant to the decision around any proposed change of control of a CSD? Do you consider that it is appropriate and proportionate to provide that the 60 day time limit for decisions on a change of control runs from receipt of the information requested? If not, can you suggest alternative approaches to enable the Bank of England to obtain the information necessary to assess an application of approval of a change of control?

Question 23: (Section 4: Enforcement powers and additional provisions)
Regarding regulation 5F, should the CSD (in addition to the person giving notice) have a right of redress if the Bank of England opposes the change of control?

Question 24: (Section 4: Enforcement powers and additional provisions)
What would be the most practical and appropriate means of enforcing regulation 5L?

Question 25: (Section 4: Enforcement powers and additional provisions)
Do you agree that the Article 66 of CSDR requirement that decisions and measures must be properly reasoned generally does not require implementing?

Question 26: (Section 4: Enforcement powers and additional provisions)
Does regulation 5J need to make it clearer that a right to refer to the Upper Tribunal arises after any reference to ESMA under CSDR has been determined?

Question 27: (Section 4: Enforcement powers and additional provisions)
Is the proposed approach to defining authorised CSD services appropriate in including both non-banking and banking type ancillary services?

Question 28: (Section 4: Enforcement powers and additional provisions)
Is the proposed approach to amending section 182 of the Companies Act 1989 adequate in ensuring compliance with Article 38 of CSDR?

Question 29: (Section 4: Enforcement powers and additional provisions)
Regarding the treatment of margin and default fund contributions in the Companies Act 1989, should the protections afforded to RCHs apply to RCSDs? Please provide reasons for your answer.

Question 30: (Section 5: Freedom to issue in an authorised CSD and other relevant provisions)
Do you agree with the proposed approach of implementing Article 49(1) of CSDR? Are proposed new regulation 2A and the proposed amendments to regulations 14 and 19 suitable for this purpose?

Question 31: (Section 5: Freedom to issue in an authorised CSD and other relevant provisions)
Do you agree with the government’s view that the requirements which have been retained in regulations 14, 15, 16, and 19 are outside the scope of CSDR?

Question 32: (Section 5: Freedom to issue in an authorised CSD and other relevant provisions)
Do you agree with the government’s approach to include third country CSDs within the definition of “Operator” and in particular to treat third country CSDs in the same way as EEA CSDs under the proposed new regulation 2A?

Question 33: (Section 5: Freedom to issue in an authorised CSD and other relevant provisions)
Do you agree with the government’s approach to enforcement of Article 49 of CSDR?

Question 34: (Section 5: Freedom to issue in an authorised CSD and other relevant provisions)
Do you agree with the proposed approach of not requiring Article 49(2) requests from issuers who currently have securities and shares recorded in the UK’s CSD?

Question 35: (Section 5: Freedom to issue in an authorised CSD and other relevant provisions)
Do you believe the proposed revision of regulation 5 is appropriate and consistent with CSDR?

Question 36: (Section 5: Freedom to issue in an authorised CSD and other relevant provisions)
Do you consider that the proposed omissions in Schedule 1 are appropriate, and are there other provisions in Schedule 1 to the USRs that you believe should be omitted due to inconsistencies or overlapping with CSDR’s requirements?

2.8 How to respond

The government welcomes responses to the questions raised in this consultation – these have been summarised in Chapter 3. Respondents are encouraged in their responses to add any additional information they feel is relevant to this consultation.

Responses to this consultation should be received by 4th February 2016. The government cannot guarantee that responses received after this date will be considered.

Responses to this consultation should be sent to: CSDRConsultation@hmtreasury.gsi.gov.uk

2.9 Confidentiality

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998, and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals with, among other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Treasury.

HM Treasury will process your personal data in accordance with the Data Protection Act and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties.

2.10 Next steps

The government will consider responses and report back before making any legislative changes as a result of this consultation.

3. Glossary

We have used the following abbreviation and technical terms in this document:

• 2014 Regulations means the Central Securities Depositories Regulations 2014 (S.I. 2014/2879)
• Banking or banking-type ancillary services means the services referred to in Section C of the Annex to CSDR (including services not explicitly listed in that Section).
• CCP means a central counterparty. EMIR defines a CCP as “a legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer”.
• CRD4 or the Capital Requirement Directive 4 means Directive (EU) 2013/36 of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.
• Credit institution means a credit institution authorised under CRD4.
• CSDR (the Central Securities Depositories Regulation) means Regulation (EU) 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on Central Securities Depositories (CSDs) and amending Directive 98/26/EC.
• CSD means a central securities depository. CSDR defines a CSD as “a legal person that operates a securities settlement system referred to in point (3) of Section A of the Annex [to CSDR] and performs as least one other core service listed in Section A of the Annex [to CSDR]”.
• DA means a delegated act made by the European Commission.
• EEA means the European Economic Area.
• EEA CSD means a CSD established in an EEA State other than the UK which has been authorised under CSDR. A definition is proposed to be inserted into section 285 of FSMA, see draft subsection (1)(f).
• EMIR (the European Market Infrastructure Regulation) means Regulation (EU) 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories.
• ESMA means the European Securities and Markets Authority.
• EU means the European Union.
• EUI means Euroclear UK and Ireland Limited.
• FCA means the Financial Conduct Authority.
• FOIA means the Freedom of Information Act 2000.
• FSMA means the Financial Services and Markets Act 2000.
• Investment firm means an investment firm authorised under MiFID or MiFID 2.
• Investment services and activities means the services and activities listed in Section A of Annex I to MiFID 2.
• ITS means implementing technical standards.
• Level two means CSDR’s ITS, RTS, and DAs.
• MiFID (Markets in Financial Instruments Directive) the means Directive (EC) 2004/39 of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC.
• MiFID 2 (the Markets in Financial Instruments Directive 2) means Directive (EU) 2014/65 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.
• MTFs means multilateral trading facilities, as defined in Article 4.1.22 of MiFID 2.
• Non-banking type ancillary services means the services referred to in Section B of the Annex to CSDR (including services not explicitly listed in that Section).
• Operator means an entity authorised as an Operator under the USRs
• OJEU means the Official Journal of the European Union.
• OTFs means organised trading facilities as defined in Article 4.1.23 of MiFID 2.
• PRA means the Prudential Regulation Authority.
• RCH means a recognised clearing house.
• RCSD means a recognised central securities depository.
• Regulated market is defined in Article 4.1.21 of MiFID 2.
• RRRs mean the Financial Services and Markets Act 2000 (Recognition Requirement for Investment Exchanges and Clearing Houses) Regulations 2001 (S.I. 2001/995).
• RTS means regulatory technical standards developed by ESMA.
• Settlement internaliser is defined by CSDR as “any institution, including one authorised in accordance with Directive 2013/36/EU or with Directive 2014/65/EU, which executes transfer orders on behalf of clients or on its own account other than through a securities settlement system”.
• SI means statutory instrument.
• Trading venue means regulated markets, MTFs and OTFs.
• USRs means the Uncertificated Securities Regulations 200 (S.I. 2001/3755).