On 24 July 2018, HM Treasury announced that it intends to bring forward secondary legislation in order to ensure the continuation of the UK settlement finality protections in the post-Brexit era. On the same day, the Bank of England (BoE) published a “Dear CEO letter” (Letter) setting out how it envisages that the future UK framework for settlement finality designation of EU systems will work.
The Settlement Finality Directive (SFD), which was implemented in the UK through the Settlement Finality Regulations (SFR), protects payments and transfers of securities made by EU participants into “designated systems” in case such participants become insolvent. This regime relies on the automatic mutual recognition among Member States of each other’s SFD designation of domestic systems. When the UK leaves the EU, the automatic recognition of the UK designated systems by the EU member states will cease.
On its website, HM Treasury noted that it will publish secondary legislation designed to ensure the continuation of UK settlement finality protections after Brexit. This legislation will:
- allow designations of non-UK financial market infrastructure (FMIs) under the UK’s existing settlement finality regulations and give the BoE functions and powers to designate these FMIs; and
- provide for a temporary designation regime to enable non-UK FMIs to continue to benefit from UK protections currently provided for by the SFD.
In its Letter, the BoE explained that it anticipates that UK domestic law requirements for the designation of systems not governed by UK law will in essence be the same as the requirements for the designation of systems governed by UK law.
The BoE expects that an EU system may wish to apply for UK SFD designation if it:
- has a participant or participants established in the UK; or
- has an indirect participant or participants that are considered as participants, within the meaning set out in the SFD, established in the UK.
The BoE does not envisage that it will be a requirement of UK law for a non-UK system to have any form of UK SFD designation in order to have UK participants.
According to the Letter, if an EU system wishes to enter into the temporary designation regime, its operator should notify the BoE of its intention to submit an application for designation. The purpose of this is to allow those EU systems that are currently designated to benefit from continued protection, until such time as they may be granted a permanent designation.
The BoE encourages the EU systems designated under the SFD to begin engaging with it for pre-application discussions by replying to the Letter stating whether they wish the system, or systems, they operate to continue to benefit from SFD designation in the UK, when the UK withdraws from the EU.
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