The Bank of England (BoE) and the UK Financial Conduct Authority (FCA) are working together to operate a new Digital Securities Sandbox (DSS) – a regime that will allow firms to use developing technology in the issuance, trading and settlement of securities.
Successful applicants to the DSS will operate under a set of rules and regulations that have been modified to facilitate this.
The DSS is intended to last for five years, after which regulators will be better informed to design a permanent technology friendly regime for the securities market.
Firms that successfully apply to the DSS will be able to manage the issuance, maintenance and the settlement of financial securities.
The central bank and UK regulator said it will also be possible to combine these activities with that of a trading venue, creating new business models.
The BoE and the FCA have three overarching aims, including: facilitating innovation to promote a safe, sustainable and efficient financial system; protecting financial stability; protecting market integrity and cleanliness.
Examples of financial instruments which could be issued and traded in the DSS include equities, corporate and government bonds, and money market instruments.
“The intention of the Bank and the FCA is that financial market participants, such as companies that use capital markets to raise finance, or participants in financial markets who trade securities, should be able to interact with the firms inside the DSS as normal while benefitting from the new technology,” the pair said in a statement.
“Similarly, unless otherwise specified by the regulators, all financial market participants will be able to use the securities issued in the DSS as they normally would any other security, including in securities financing transactions, or as collateral.”
Derivative contracts based on those securities can also be written, with those activities still being required to comply with the regulations that govern them.
The BoE stated that it will impose limits on the value of securities that can be issued in the DSS to protect financial stability.
The DSS will comprise of varied stages of permitted activity, with a series of gates for sandbox entrants to move through, with permitted activity increasing with each stage.
“The application of new technology such as distributed ledgers could materially improve the efficiency of ‘post-trade’ processes that take place after a trade is executed,” added the BofE and the FCA..
“By making these processes faster and cheaper, the adoption of these technologies could, if successfully implemented, lead to material savings across financial market participants, such as pension funds, investment firms and banks.”
In order to meet the aims of the DSS, while giving fair consideration to the impact of their policy on key stakeholders, the BoE and the FCA have released a consultation paper. The closing date for responses is 29 May 2024.
Following the review period, a formal communication will be issued with final guidance and rules. The DSS is expected to open applications in the summer of 2024.