An initiative known as the Distributed Ledger Technology Securities Settlement (DSS) is set to transform the issuance, trading, and settlement of securities like shares and bonds. This regime, lasting five years, offers firms the opportunity to leverage cutting-edge technologies like distributed ledger technology (DLT) within a modified regulatory framework tailored to facilitate innovation.
Firms approved for the DSS can engage in activities typically associated with central securities depositories, including issuing, maintaining, and settling financial securities. Moreover, they can integrate these functions with trading venues, paving the way for innovative business models.
Operated jointly by the Bank of England (the Bank) and the Financial Conduct Authority (FCA), the DSS aims to:
- Foster innovation for a safe, sustainable, and efficient financial system.
- Safeguard financial stability.
- Ensure market integrity and cleanliness.
Financial instruments eligible for issuance and trading under the DSS include equities, corporate and government bonds, money market instruments (e.g., commercial paper, certificates of deposits), fund units, and emissions allowances. However, derivative contracts and unbacked cryptocurrencies such as Bitcoin are excluded from the scope of the DSS.
Notably, the Bank will impose limits on the value of securities issued under the DSS to protect financial stability, considering the novelty of these technologies in significant financial markets.
The DSS presents a phased approach to permitted activities, allowing firms to progress through stages with increasing activity levels. Successful participants may transition to a permanent regime if they meet relevant standards, showcasing the potential for long-term integration of new technologies into securities market operations.
One of the key benefits of the DSS is the potential for significant efficiency gains in post-trade processes, benefiting various financial market participants such as pension funds, investment firms, and banks by reducing costs and enhancing speed.
To ensure a balanced and impactful implementation, the Bank and FCA have released a consultation document outlining the DSS’s operation, rules, fee structure, and draft guidance for potential applicants. Stakeholders are encouraged to provide feedback and insights, contributing to the initiative’s success in reshaping the financial landscape.
Key Points:
- DSS revolutionizes the securities market with cutting-edge technology.
- Allows firms to issue, trade, and settle securities under modified regulations.
- Bank of England and FCA jointly operate the DSS.
- Aims to foster innovation, safeguard financial stability, and ensure market integrity.
- Eligible instruments include equities, bonds, fund units, and emissions allowances.
- Excludes derivative contracts and unbacked cryptocurrencies.
- Phased approach with increasing permitted activities.
- Focuses on efficiency gains in post-trade processes.
- Consultation process for feedback and stakeholder input.
References
https://www.bankofengland.co.uk/paper/2024/cp/digital-securities-sandbox-joint-bank-of-england-and-fca-consultation-paper