Guidance

Draft Central Securities Depositories (Amendment) (EU Exit) Regulations 2018: explanatory information

Updated 13 August 2019

1. Context

The European Union (Withdrawal) Act 2018 (”the 2018 Act”) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law.

The purpose of the 2018 Act is to provide a functioning statute book on the day we leave the EU. The 2018 Act also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.

HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.

This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition.

2. Notice

The attached draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.

3. Policy background and purpose of the SI

3.1 What does the underlying EU regulation and UK law do?

Central Securities Depositories (“CSDs”) are financial market infrastructures which keep a record of who owns individual securities, such as shares or bonds. They facilitate the transfer of securities between people and companies by registering a change of ownership after a trade is agreed (‘settlement’). CSDs also provide for the initial recording of new securities.

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 (“the CSDR”) created a common authorisation, supervision and regulatory framework for CSDs at EU level. The CSDR harmonises the timing and conduct of securities settlement in the EU and the rules governing CSDs. The CSDR has been implemented in the UK via the Central Securities Depositories Regulations 2014 (S.I. 2014/2879)(“the 2014 Regulations”) and Central Securities Depositories (Amendments) Regulations 2017 (SI 2017/1064) (“the 2017 Regulations”).

The Central Securities Depositories (Amendments) (EU Exit) Regulations 2018 (“the 2018 Regulations”) make technical changes to the CSDR to ensure that the UK retains an operative regulatory framework for CSDs in the event of a no deal scenario when the UK leaves the EU; transfer the power to make equivalence decisions from the Commission to the Treasury; transfer powers from ESMA to the Bank of England enabling the Bank of England to recognise third country CSDs post exit; and make amendments to the CSDR transitional regime so that third country CSDs can continue to provide services relating to the UK after exit.

3.2 Deficiencies this SI remedies

The SI addresses deficiencies in UK law and retained EU law that arise from the UK leaving the EU. It forms part of HM Treasury’s contingency planning for a no deal scenario, making the necessary changes to ensure the UK continues to have a functioning financial services regime from exit day, regardless of the outcome of negotiations. We will be laying this legislation as a contingency. Changes introduced by the SI include:

Amendment of retained direct EU legislation - Part 3 of the statutory instrument

The SI makes amendments to ensure that the CSDR continues to operate effectively in the UK post-Brexit. For example, the definition of “CSD” now covers UK CSDs only, rather than all EU CSDs, and non-UK CSDs are defined as “third-country CSDs”.

Article 3(1) relating to book-entry form will not apply before exit day, so will not become UK law after exit day and will not appear in the onshored CSDR.

Articles 6 to 8 of the CSDR relate to the settlement discipline regime. Articles 6 and 7 will not be in force before exit day. As a result, they cannot be considered retained EU law and are beyond the scope of the 2018 Act. They will not become UK law after exit and will not appear in the onshored CSDR. Article 8 will be in force before exit day, but as it concerns the enforcement of Articles 6 and 7, it is not considered appropriate for inclusion in retained EU law, and hence is being omitted by the SI.

The SI transfers various functions and powers currently held by the European Securities and Markets Authority (ESMA) to the appropriate UK authorities – the Bank of England, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

Powers are being transferred to the Bank of England for the purpose of recognising third country CSDs. The Commission’s powers to make equivalence decisions are being transferred to HM Treasury (Article 25). Under Article 25 once an equivalence decision is made by HM Treasury in relation to a third country, a CSD in that third country will be able to apply for recognition from the Bank of England.

The FCA and the PRA will be responsible for drafting the regulatory technical standards to further specify details of the frameworks and tools for monitoring, measuring, management, reporting and public disclosure of credit and liquidity risks.

Transitional arrangements – Parts 2, 3 and 5 of the Statutory Instrument

The SI makes amendments to the transitional arrangements under Article 69 of the CSDR and related provisions in the 2017 Regulations. These amendments are intended to allow third country CSDs who wish to continue to provide services relating to the UK after exit to continue to benefit from transitional arrangements.

A requirement is introduced for third country CSDs to notify the Bank of England before exit day of their intention to provide services in the UK following exit. This requirement will also apply to any third country CSD benefiting at the point of exit from the transitional under the EU CSDR or the 2017 Regulations. Third country CSDs within the transition will be subject to existing UK law rather than the CSDR until their application for recognition has been determined or the time limit for such application has expired (six months from their jurisdiction being determined equivalent by HM Treasury). Any third-country CSD which is offering CSD services in the UK and fails to notify the Bank of England may be subject to public censure, as set out in the Financial Services and Markets Act 2000 (FSMA).

Further, existing UK CSDs that have made an application to the Bank of England for authorisation prior to exit will be subject to existing UK law rather than the CSDR while that application is being considered.

The domestic legislation which was relevant to the regulation of CSDs prior to the CSDR can be found in Part 18 of FSMA. This sets out a regime under which entities such as CSDs and Central Counterparties are exempt from the FSMA general prohibition, provided they have been designated as “recognised clearing houses” by the Bank of England or FCA.

3.3 Relevant Rulebook and Binding Technical Standard changes

The Bank, and the PRA as appropriate, will be updating the relevant Binding Technical Standards to reflect the changes introduced through this SI, and to address any other deficiencies due to the UK leaving the EU. Details of the Bank’s approach can be found here. The Bank has confirmed its intention to consult on these changes in the Autumn.

The Bank and the PRA are leading on the CSDR BTS and consulting the FCA. Therefore, the FCA will review the BTS and feed comments back to the Bank and the PRA. The Bank and the PRA will update and consult on the CSDR BTS through their formal arrangements. The FCA will not consider the BTS as part of its formal process or consult on the changes.

3.4 Stakeholders

The key stakeholders are CSDs operating in the UK at the point of exit and CSDs who are currently providing services relating to the UK as defined in Article 25 of the CSDR. End-users of CSD services, market infrastructures with links to UK CSDs and firms that undertake settlement internalisation, will also want to know how their existing arrangements and future reporting obligations will be affected.

As already noted, the intention of this SI is not to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this position. HM Treasury has engaged with industry bodies where possible to ensure awareness of these changes.

This SI does not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK Government’s Statement in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary, provisions covering Gibraltar will be included in future SIs.

4. Next steps

HM Treasury plans to lay this instrument before Parliament before exit.

5. Further information

Read HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act 2018 (PDF, 212KB).

6. Enquiries

If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.