European Union: Draft UK Post-Brexit Legislation Published To Onshore The EU Central Securities Depositories Regulation

On October 22, 2018, HM Treasury published a draft of the Central Securities Depositories (Amendment) (EU Exit) Regulations 2018, along with explanatory information. The draft Regulations:

• make technical changes to address deficiencies in the retained EU Central Securities Depositaries Regulation and related U.K. implementing legislation, to ensure that the U.K. regulatory framework for CSDs remains operative in the event of a "no-deal" scenario, in which the U.K. exits the EU on March 29, 2019 without a ratified Withdrawal Agreement. A "no-deal" scenario would mean that there would be no transitional period following Brexit and that the U.K. would be treated as a third country by the EU after exit day;
• transfer to HM Treasury the power currently exercised by the European Commission to make equivalence determinations in respect of non-U.K. regimes for regulating CSDs;
• transfer the powers currently exercised by the European Securities and Markets Authority to the Bank of England to enable the BoE to recognize third country CSDs after exit day; and
• amend the CSDR transitional regime so that third country CSDs can continue to provide services relating to the U.K. after Brexit. Third country CSDs (including EU CSDs authorized in the EU before exit day) must notify the BoE before exit day of their intention to provide services in the U.K. following Brexit and risk public censure if they fail to do so. Any third country CSDs that are benefitting from CSDR transitional arrangements at the point of exit, and any U.K. CSDs that have applied for authorization prior to exit, will be subject to existing U.K. law rather than the CSDR.

The draft Regulations are primarily relevant for CSDs operating in the U.K. at the point of exit and CSDs that are currently providing services relating to the U.K. as defined in the CSDR. The draft Regulations are also relevant for end-users of CSD services, market infrastructures with links to U.K. CSDs and firms that undertake settlement internalization. CSDs that also provide settlement services will also find relevant the U.K. government's announcement in July 2018 that it proposes to legislate to ensure the continuation, post-Brexit, of U.K. settlement finality protections currently provided under the Settlement Finality Directive.

The draft Regulations are primarily relevant for CSDs operating in the U.K. at the point of exit and CSDs that are currently providing services relating to the U.K. as defined in the CSDR. The draft Regulations are also relevant for end-users of CSD services, market infrastructures with links to U.K. CSDs and firms that undertake settlement internalization. CSDs that also provide settlement services will also find relevant the U.K. government's announcement in July 2018 that it proposes to legislate to ensure the continuation, post-Brexit, of U.K. settlement finality protections currently provided under the Settlement Finality Directive.

The draft Regulations contain a number of changes to CSDR, which are intended to give effect to Brexit and establish a U.K. regime for CSDs, some of which might not have been expected. First, the settlement discipline regime provided for in the CSDR is not scheduled to come into force until September 2020 and accordingly will not be in force before exit day. Furthermore, it seems intended that the current settlement discipline regime will not become U.K. law, at least on exit day, as the draft Regulations remove from the retained CSDR the provisions that would operate to bring it into force. In the explanatory information provided, HM Treasury states that the settlement discipline regime will not appear in the onshored version of the CSDR. However, the draft Regulations do not delete the relevant operative provisions from the retained CSDR, which is somewhat surprising and raises uncertainty as to their status. The intention seems to be that a subsequent SI will bring into force a U.K. version of the settlement discipline provisions. This leads to at least a certain amount of legal and operational planning uncertainty for U.K. market participants compared to the EU27 position, given that technical standards under these provisions have now been published, allowing firms subject to the EU27 rules to plan in a way that U.K. firms cannot presently.

In addition, various of the access provisions (concerning access rights between issuers and CSDs or between CSDs and CCPs) have been expanded so as apparently to create new rights on third country issuers and CCPs to access U.K. CSDs, which are not found in CSDR:

• the wording of the draft Regulations amends the retained CSDR to broaden the CSDR provisions on access rights, in that, as currently drafted, the application of those provisions to third country (i.e. non-U.K.) CSDs includes third country CSDs that have not been recognized by the BoE; and
• as drafted, the draft Regulations confer rights on non-U.K. issuers of securities to have their issues recorded in a U.K. CSD.

HM Treasury intends to formally lay the Regulations before Parliament before exit day. The draft Regulations will enter into force partly on the day after the day on which they are made, with the remainder of the Regulations entering into force on exit day.

Separately, the BoE and the U.K. Prudential Regulation Authority (as appropriate and in consultation with the U.K. Financial Conduct Authority) will update the relevant binding technical standards to align them with the provisions of the draft Regulations. The BoE intends to consult on the changes in autumn 2018.

The draft Regulations are available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/750361/Draft_CSDR_SI_Text.pdf, and the explanatory information is available at:  https://www.gov.uk/government/publications/draft-central-securities-depositories-amendment-eu-exit-regulations-2018/draft-central-securities-depositories-amendment-eu-exit-regulations-2018-explanatory-information.

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